The average stock market return since 1926 is about 10.2%, including dividends. If someone were to tell you that you'd average 10% a year for the next 10-30 years, I'm assuming most of you would gladly invest your money.
Unfortunately, the percentage of Americans investing in the stock market has steadily declined to around 50% as of 2021. With stock market volatility back like a vengeance, the average stock market return will likely decline.
The Wealthy Own A lot Of Stock
As of 2021, the top 10 percent of Americans owned an average of $969,000 in stocks. The next 40 percent owned $132,000 on average. For the bottom half of families, it was just under $54,000.
We’ve seen over a 250% rise in the S&P 500 since 2009, meaning that serious wealth has been made by the wealthiest of Americans. What’s even more astounding is that the top 1 percent of households by wealth owned nearly 38 percent of all stocks shares according to research by NYU economist Edward Wolff.
All this data means that the median net worth for the middle class has not only gone nowhere since the height of the last boom in 2007, but down and has never recovered unlike the mass affluent or the top 1 percent.
The Average Stock Market Return Is Likely Going To Decline
Even though the average stock market return since 1926 is about 10%, the returns over recent years have slowly begun to decline.
Below is the historical risk/return of various stock and bond portfolio weightings according to Vanguard, one of the largest money managers in the world who pioneered index investing.
If you invested 100% in stocks since 1926, you would have averaged 10.2%, but would have lost 43.1% in your worst year and gained 54.2% in your best year. About 28% of the years you would have lost money too, which doesn't sound very good.
Now let's take a look at the average stock market return in more recent years: 1999 – 2018 according to J.P. Morgan, one of the other large money manager in the world.
As you can see from the data, the S&P 500 gained only 5.6% a year for the 20 year period between 1999-2018. 5.6% is almost half the performance of the historical average since 1926. What gives?
One of the main reasons why stock market returns are compounding lower is due to two large corrections in 2000 and in 2008-2009.
The other main reason could be the continuous decline in the risk-free rate of return, or the 10-year bond yield. All returns correlate with the risk-free rate of return because nobody would invest in a risky asset if there wasn't an appropriate risk-premium.
As or 4Q2019, the 10-year bond yield is at 1.5%. Back in 1999, the 10-year bond yield was at 6%. You would think that as the risk-free rate returns, more investors would want to invest in risk assets like stocks to gain a greater return, but the money has moved to real estate as the alternative asset class of choice.
Annual Returns Of The S&P 500
For more details, you can see the annual percentage change in the S&P 500 with dividends since 1965.
| Year | Percentage Change In The S&P 500 With Dividends |
|---|---|
| 1965 | 10.0 |
| 1966 | -11.7 |
| 1967 | 30.9 |
| 1968 | 11.0 |
| 1969 | -8.4 |
| 1970 | 3.9 |
| 1971 | 14.6 |
| 1972 | 18.9 |
| 1973 | -14.8 |
| 1974 | -26.4 |
| 1975 | 37.2 |
| 1976 | 23.6 |
| 1977 | -7.4 |
| 1978 | 6.4 |
| 1979 | 18.2 |
| 1980 | 32.3 |
| 1981 | -5.0 |
| 1982 | 21.4 |
| 1983 | 22.4 |
| 1984 | 6.1 |
| 1985 | 31.6 |
| 1986 | 18.6 |
| 1987 | 5.1 |
| 1988 | 16.6 |
| 1989 | 31.7 |
| 1990 | -3.1 |
| 1991 | 30.5 |
| 1992 | 7.6 |
| 1993 | 10.1 |
| 1994 | 1.3 |
| 1995 | 37.6 |
| 1996 | 23.0 |
| 1997 | 33.4 |
| 1998 | 28.6 |
| 1999 | 21.0 |
| 2000 | -9.1 |
| 2001 | -11.9 |
| 2002 | -22.1 |
| 2003 | 28.7 |
| 2004 | 10.9 |
| 2005 | 4.9 |
| 2006 | 15.8 |
| 2007 | 5.5 |
| 2008 | -37.0 |
| 2009 | 26.5 |
| 2010 | 15.1 |
| 2011 | 2.1 |
| 2012 | 16.0 |
| 2013 | 32.4 |
| 2014 | 13.7 |
| 2015 | 1.4 |
| 2016 | 12.0 |
| 2017 | 21.8 |
| 2018 | -4.4 |
Every year since 2009 has been solid, except for 2018. 2019 is shaping up to close the year up at least 10%, after being up as much as 20%. A lot of volatility is back due to trade war rhetoric and fears of a recession due to an inverted yield curve.
Future Stock Market Returns Forecast By Vanguard
In August 2021, the money management giant, Vanguard, came out with its 10-year U.S. stock market, U.S. bond market, and inflation forecast for the next 10 years. Have a look for yourself.
Vanguard is forecasting only a 4.02% annual return for U.S. stocks over the next 10 years. As a result, retirees will either have to accumulate more capital, lower their safe withdrawal rate in retirement, or make supplemental retirement income.
If you are planning for a 50-year retirement as an early retiree, you've really got to plan more carefully with such low average stock market return assumptions.
Easiest Ways To Invest In The Stock Market
The easiest way to invest in the stock market is through an ETF.
The largest and most popular ETF is the SPDR S&P 500 trust (SPY), founded by State Street Global Advisors in 1993 as the first exchange-traded fund in the U.S. The fund has a net expense ratio of 0.0945%.
One of the most popular S&P 500 index funds is the Vanguard Total Market Fund (VTSAX). It was created in 1992 to mirror the performance of the S&P 500. It has an expense ratio of just 0.04%, which is one of the lowest, if not lowest expense ratios in the industry.
An individual investor can simply by one of these investments to gain low-cost exposure to the S&P 500. The tricky part is figuring out how much to buy in relation to your other assets like bonds, cash, and real estate.
This is where a low-cost digital wealth advisor like Betterment comes in. Betterment was founded in 2008 and creates a model portfolio for you based on your risk tolerance. Your risk tolerance is determined by answering a number of questions when you first sign up. From there, all you have to do is automatically contribute and your money will be invested in a basket of Vanguard ETFs accordingly.
Below is a sample of a model portfolio where an individual has a higher risk tolerance with a 90% weighting in stocks. The key to investing is stocks is to dollar cost average consistently over time.
Real Estate Rises As The Preferred Asset
Despite the housing bubble that started to pop in 2007, there is no denying that REITs (#1 performer), commercial real estate, and residential real estate have performed well since 1999.
Homes show only a 3.4% compound increase from 1999 – 2018, but most homes are bought with 20% down or less. As a result, the cash-on-cash return for Homes is closer to 15%+ a year.
More capital is seeking real estate because borrowing costs are not only lower, but the volatility of real estate prices is lower as well. People understand real estate because it provides utility and is something tangible, unlike stocks.
Everybody should own at least their primary residence to stay neutral real estate. It's only when you own your primary residence and buy more real estate are your truly long real estate.
You can buy REITs for broad exposure. You can also invest in real estate crowdfunding through a platform like Fundrise, to gain more surgical exposure.
I'm bullish on the heartland of America because valuations are lower and net rental yields are higher. In the past, there was no way I could efficiently invest in a commercial property in Dallas, for example. Today, I can invest as little as $500 to gain diversified exposure to a market that is seeing an influx of residents thanks to technology and job growth.
I've personally invested $810,000 in real estate crowdfunding after selling my expensive SF rental for 30X annual gross rent back in 2017. It feels good diversifying my assets and earning income 100% passively. I strongly belive there will be a multi-decade migration shift away from expensive coastal cities and into lower cost areas of the country.
Fundrise is free to sign up and explore. They are by far the most innovative and most high quality platform today.
Invest In Stocks, Bonds, And Real Estate
As a long-term investor, it's worth investing in stocks, bonds, and real estate to build wealth. Each asset class has its advantages and disadvantages.
Personally, I'm biased towards investing in real estate in strong economic cities such as San Francisco, Austin, Memphis, and Washington D.C. I like the lower volatility of real estate and the steady growth and income.
But I also love to invest in great companies and gain 100% passive income exposure from dividend stocks and real estate crowdfunding.
Whatever you do, don't just spend all your money and live for today. You must invest for tomorrow because there will come a time where you will no longer have the desire or energy to work.
I've been retired since 2012 because I saved 70% of my income on average for 13 years and invested 100% of my savings each year. As a result, I was able to walk away with about $80,000 a year in investment income to live the life the way I want. Yes, the beginning years took sacrifice. But having the freedom to do what you want, whenever you want is priceless.