There is a silver lining to this constant stock market drama. If someone loses big in the stock market, there’s a chance they’ll gain their money back over time — with time in the market giving many investors an upside over timing the market.
That’s because many people typically don’t invest in the stock market for just one year. Instead, they invest for the long term in the hopes that the investments they buy today will be worth more years from now when they decide to sell. With that in mind, it may be helpful to look at the average stock market return over the last 5, 10, 20, and 30 years to understand stock price movement.
By looking at shorter and gradually longer time periods, it’s interesting to see how different events have impacted market returns over the last three decades.
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Average Market Return for the Last 5 Years
According to the S&P annual returns from 2017 to 2021, the average stock market return for the last five years was 17.04% (13.64% when adjusted for inflation). That’s significantly above the average stock market return of 10%. It’s possible this figure may have been even higher if stocks’ performance overall had not been marked by pandemic-related volatility early in 2020.
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Average Market Return for the Last 10 Years
Looking at the S&P 500 from 2012 to 2021, the average S&P 500 return for the last 10 years is 14.83% (12.37% when adjusted for inflation), which is also higher the annual average return of 10%.
The stock market had its ups and downs over the decade, but the only years that experienced losses were 2015 and 2018, and the losses weren’t major — 0.73% and 6.24%, respectively.
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Average Market Return for the Last 20 Years
Looking at the S&P 500 from 2002 to 2021, the picture changes. The average stock market return for the last 20 years was 8.91% (6.40% when adjusted for inflation), which is lower than the average 10% return.
That makes sense given that the United States experienced some major lows and notable highs from 2000 to 2009.
In early 2000, the market was doing exceptionally well, but from late 2000 to 2002, the dot-com bust contributed to losses for three consecutive years. That period wasn’t helped by the aftermath of 9/11 in 2001.
Then in 2008 the financial crisis led to huge losses. Looking at these factors, it isn’t a huge surprise that the 20-year average stock market return is lower than the annual average.
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Average Market Return for the Last 30 Years
When we add another decade to the mix, the average return inches closer to the annual average of 10%. Looking at the S&P 500 for the years 1992 to 2021, the average stock market return for the last 30 years is 9.89% (7.31% when adjusted for inflation).
Some of this success can be attributed to the dot-com boom in the late 1990s (before the bust), which resulted in high return rates for five consecutive years.
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What Is a Stock Market Return?
A stock market return refers to the profit, stock dividend, or both that an investor receives on their investment. To understand stock market returns, it helps to know why the stock market fluctuates.
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Factors that Impact the Stock Market
It’s important to remember that some factors will influence the performance of individual companies more than others, or impact certain sectors more than others. All this can play into the so-called average returns of the stock market.
For example, if supply chains are disrupted, as they were during the global Covid pandemic, that can have an impact on manufacturing of various products; demand for those products; the price of consumer goods and commodities; and so on.
Higher employment rates or lower employment rates can also impact markets, as can inflation, interest rates, consumer debt levels, construction, and more.
Because the world is increasingly interconnected, markets that were once considered separate from the U.S. are now far more interdependent. The conflict in Ukraine has had far-reaching implications for Europe, the Middle East, as well as the U.S. and other regions.
As multiple companies’ share prices fluctuate simultaneously, the stock market as a whole can swing up or down. If a trade war or regional conflict or global pandemic affects companies’ production overseas, or consumers’ ability to spend domestically, numerous big businesses’ shares could drop, and the public could become uncertain about the U.S. economy.
As a result, the market could dip. When tariffs on imports and exports ease, some stocks can rise — as traders anticipate reduced costs passed on to consumers and to businesses.
All this volatility affects stock market returns. When people wonder what their return will be, they’re asking how much they will have gained (or lost) in a year, or 10, 20, or 30 years. While everyone invests in different stocks and funds, a simple way to estimate how much you might gain — in order to make longer-term financial plans — is by looking at the average stock market return.
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Measuring Growth in the Stock Market
How do people measure stock market returns? By looking at indexes. An index is a group of stocks that represents a section of the stock market, and there are roughly 5,000 indexes representing U.S. stocks. Investors may be familiar with the three most popular market indexes: The Dow Jones Industrial Average, Nasdaq Composite, and S&P 500.
When people refer to the stock market and the average stock market return, they’re likely referring to the S&P 500.
The S&P 500 index represents the 500 largest publicly traded companies, such as Microsoft, Apple, Amazon, Meta, and Alphabet. It stands for around 80% of the U.S. stock market, so the performance of this particular index is considered a good indicator of how the market is doing overall.
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What Is a Good Annual Return on Stocks?
When discussing the average rate of return on stocks and what you can expect, it’s important to be realistic. As mentioned, the stock market average return tends to hover around 10%, though when you factor in inflation, stock market returns tend to be closer to 6%.
Using the 6% figure as a baseline, an investor might choose to construct a portfolio that’s designed to produce that level of returns. If you’re invested in funds that track the S&P 500, then you’re more likely to realize stock market returns that fall within the average or typical range. Anything above 6% might be considered icing on the cake.
If an investor is looking for above-average stock market returns, they might choose to take a more aggressive approach to building a portfolio, by looking at actively managed funds or momentum trading, for example, to try to capitalize on higher return potential. But those strategies can entail greater risk — and as always, there’s no guarantee that an investor will beat the market. Plus, active trading may mean paying higher expense ratios or commissions, which can eat into investment gains.
Using a buy-and-hold strategy and staying investing when the market moves up or down may help an investor realize consistent returns over time. With dollar-cost averaging, for instance, one would continue adding money to the market regardless of how high or low stock prices go. In doing so, they’d be able to ride the waves of the market as stock market returns increase or decrease, though they may not beat the market this way.
Taking this attitude can help an investor avoid falling into the trap of panic-selling when market volatility sets in. This is important because getting out of the market — or into it — at the wrong time could significantly impact a portfolio’s overall return profile.
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Why the S&P 500 Average Return Is Rarely ‘Average’
The annual average of 10% is not a reliable indicator of stock market returns for a specific year because outliers can skew the annual average. When the return is much higher or much lower than usual in certain years, those years are known as outliers.
For example, the average stock market return for the last 20 years may seem a little low at 8.91%, especially when compared to the return for the last 10 years, which was 14.83%. And it’s not that there were so many bad years from 2002 to 2021. In fact, in 2003, the average return was 26.38%, and it was 23.45% in 2009.
But there were negative outliers that affected the 20-year average.
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Dot-Com Bubble
Returns from 2000 to 2009 are perfect examples of outliers in the stock market. The late 1990s were the years of the dot-com bubble, when technology and website-based companies became hugely popular with investors. But in 2000, companies like Cisco and Dell placed huge “sell” orders on their stocks, and investors started panic-selling their shares.
This period is often referred to as the dot-com bust, and the market experienced annual losses for three years. In 2000, the average annual loss was 10.14%; in 2001, returns dropped by 13.04%; in 2002, they plummeted by 23.37%.
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Financial Crisis of 2008
Another example of an outlier is the financial crisis of 2008. For years, banks had given unconventional loans to people with low income and bad credit so they could buy houses. As more people bought homes, housing prices increased drastically. People could no longer afford their homes, which put lenders in a tough spot.
The Fed proposed a bank bailout bill, but Congress denied the bill in September of that year, resulting in a market crash. Congress passed the bill in October, but it couldn’t immediately undo the damage on the stock market. In 2008, the market fell by a whopping 38.49%.
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Market Recovery
The dot-com bust and the financial crisis of 2008 are two prime examples of outliers that have caused stock returns to drop more than usual. But in years following these negative outliers, the stock market soared.
Panic from the dot-com bust and other tensions finally started to calm down in late 2003, and the market return was 26.38% for the year. Annual average returns continued to trend upward for four more years, until the crisis of 2008.
After the market crashed in 2008, it bounced back with a return of 23.45% in 2009 and continued to rise for six years. The first loss was in 2015, and that was only a dip of 0.73%.
Steep drops are often followed by sharp gains — and by consecutive annual gains, even if they aren’t huge. People who panicked and sold their stocks in 2008 once share prices started to drop likely lost a lot of money. But those who held onto their positions probably increased their earnings by 2012, when market returns had finally increased enough to offset how much the market lost in 2008.
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Future Stock Market Growth Predictions
As we can see from the outliers during the dot-com bust and financial crisis, when the stock market performs poorly, it tends to eventually bounce back. Similarly, if the stock market does exceptionally well, the market will eventually slow down and experience a loss. This can help with evening out the average return on stocks for investors.
The widely accepted rule is that if an investor’s rate of return is low now, they can expect it to be high in the future; if their rate of return is high now, they can expect it to be low in the future. Historically, the market balances out and experiences positive growth overall. Stock market returns increase around 70% of the time.
When share prices peak, then drop by 10% or more, that’s known as a stock market correction. If the market is doing swimmingly, investors can bet the market will correct itself by dipping.
All investments have risk, so there’s no way to guarantee a certain stock market return at all, let alone in a specific time frame. Numerous factors affect stocks’ performance, so it can be difficult to accurately predict how a stock will perform. And anyone who tells investors they can time the stock market to maximize returns is dead wrong.
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The Takeaway
While the average stock market return is 10% annually in the U.S., that number has some caveats attached.
Realistically, that figure is more like 6% to 7% when accounting for inflation. Plus, very few years see a stock market return of 10% — that number reflects an average, rather than a norm. Most years the market has higher or lower average returns.
It’s important to remember that “average” isn’t always average. If you’re invested in a certain sector or certain companies, those returns would likely be different than the stock market overall. Market returns often depend on broader economic conditions that affect investor sentiment, as well as the performance of individual companies.
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