Between 1950 and 2021, the average annual return of the S&P 500 was 10.13%. Few asset classes have delivered such terrific results over a multi-decade time horizon.
And what’s more, the stock market is a much more liquid asset than real estate or precious metals like gold or silver — making it even more attractive for investors who like flexibility.
While it’s technically true that the stock market delivers an average return of 10% per year, it’s a mistake to get too anchored to that number. Here’s why.
Image source: Getty Images.
Not all averages are created equal
Some averages can be very useful. Average miles per gallon on a highway is a good indicator of fuel efficiency for a car. A field goal shooting percentage in basketball is the product of hundreds, if not thousands, of shot attempts in a season. And in baseball, a batting average for even just one season is the result of hundreds of at-bats in a set environment the same distance from the pitching mound. Yes, there are different umpires and pitchers per at bat. But it’s a metric that is reliable, given the consistency of the setting and the sample size.
The stock market’s average couldn’t be more different. Not only is the sample size relatively small, but the economy has changed so much in the last 10 years alone. What’s more, how the stock market performed in the years prior can heavily influence its performance in a given year.
For example, the S&P 500 delivered a -17.4% return in 1973 and then a -29.7% return in 1974, which left it undervalued and poised for a 31.6% return in 1975 and then a 19.15% return in 1976. The same goes for the post-dot-com rally in the Nasdaq Composite or the S&P 500’s torrid growth rate since the financial crisis.
Each year in the stock market is a mixed bag of long-term themes that are playing out in real time and short-term tailwinds or headwinds. For example, in 2018 we had the U.S.-China trade war clash with strong earnings. 2018’s 6.2% decline was followed by a 29.9% gain in 2019 thanks to low interest rates and strong earnings growth. 2020 brought the pandemic, but the market gained 16.3% anyway thanks to multi-decade-low mortgage interest rates, stimulus, and the belief that the issue was temporary.
2021 played off that momentum with a 26.9% gain. And this year, rising interest rates, rising mortgage interest rates, record home prices, inflation, and geopolitical tensions on top of what was a relatively expensive market have led to losses so far.
In sum, no single year in the stock market is the same. And that makes for big variations in the average return.
Expect variability
This chart shows S&P 500 returns (not including dividends) for each year between 1950 and 2021. The mean return is, as mentioned, 10.13%. The median is 12.36%. And the standard deviation is 16.04 percentage points.
The red bars show the return that year, and the two light blue lines show the range between one standard deviation above and one standard deviation below the median.
Data source: Macrotrends. Chart by author.
