The Myth of Average Stock Returns

average returns Jan 13, 2023
average returns are a myth

Average stock market returns are a myth. This statement may come as a surprise to many investors, as the conventional wisdom is that the stock market historically returns around 10% per year. However, this number is not an accurate representation of the returns that individual investors can expect to receive.

The 10% figure is an average of the returns of the overall market over a long period of time, such as the past century. However, this average includes both periods of high returns and periods of low or negative returns. In reality, an individual investor's returns will vary greatly depending on when they invest and how they invest.

In short, this number is meaningless.

As it turns out between 1926 and 2022, the stock market returns were only in the “average” band of 8-12% seven times!

You read that right. Seven times.

Remember that the nature of an “average” means that most of the numbers will be above or below...but never the actual “average”.

What long-term charts do very well is mask volatility and periods of substantial declines.

When viewed over shorter periods, we find that average returns are anything but “average” and are heavily influenced by current events.

Events such as depressions, World Wars, 1970’s stagflation, deregulation, demographics, Federal Reserve policy, bubbles, and market crashes.

For example, an investor who invested in the stock market at the beginning of the 2008 financial crisis would have seen a significant decline in their investment value. On the other hand, an investor who invested at the bottom of the market in 2009 would have seen a significant increase in their investment value.

In fact, the average return of the past decades has varied considerably as this table demonstrates.

As can be seen, over shorter time spans, there is a great variance between returns, including two “lost decades” where returns were less than 0%.

It is not what is advertised...but a reality that has and will continue to impact investors who are not prepared.

Furthermore, the 10% figure does not take into account the effects of inflation, which can greatly reduce the purchasing power of an investor's returns. When accounting for inflation, the real return on the stock market is closer to 7%.

Conclusion: The “average return” is a myth. While over the very, very, long term, the stock market average return is near 10%, rarely, if ever, will an investor, when left to chance, earn a return anywhere close the the "average return".

Individual investors can expect to see a wide range of returns depending on when they invest and how they invest.

There is something that investors can do, however. Using a predictable, systematic process to manage a portfolio can help smooth out the ups and downs and create a more predictable outcome. The two components of any good strategy must be a proven, robust method to capture the upside, and a rigorous method to manage downside risk. 

Fortunately, Drawbridge Strategies makes this easy for investors as every model includes these two important factors automatically. 


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