How Often Does the Stock Market Deliver “Average” Returns?

4 min read

Cincinnati has experienced some unusually high temperatures this past week:

To find out just how unusual these temperatures are, I dug up some numbers that show the average daily high during each month for Cincy:

Data source: Current Results Weather

Historically, the average daily high in September and October has been 79° F and 68° F, respectively. 

So yeah, to experience temperatures in the low 90s towards the end of September and the beginning of October is pretty unusual.

To be fair, though, the numbers that I dug up only show the average daily high by month. It’s perfectly reasonable for the temperature to be higher or lower than the average in any given year.

Similar to weather fluctuations, the stock market doesn’t always deliver average returns either.

Deviations from the Average

Consider the following chart that shows the average daily high by month for three different cities: Cincinnati, Austin, and Minneapolis:

When you live in one of these three cities, you know what the temperature will be like during certain times of the year on average.

If you live in Austin, you know that it will scorching hot during the summer. And if you live in Minneapolis, you know it will be freezing during the winter months.

But just like Cincinnati temperatures have bucked the norm in September and October, it’s entirely possible for temperatures to deviate from the average during any given year in any city.

Similarly, historical data tells us that when you invest in a broad stock market index fund you can expect roughly 7% annual returns (after inflation) over the long run. During any given year, though, the market is not guaranteed to deliver precisely 7% returns.

As evidence, check out the chart below that shows the inflation-adjusted annual returns of the S&P 500 from 1928 through 2018:

The long-term inflation-adjusted annual return of the S&P 500 varies based on the starting year you choose to look at.

For example, the inflation-adjusted annual return (let’s call this IAAR, for short) from 1928 to 2018 was 6.3%. The IAAR from 1932 to 2018 was 7.1%. The IAAR from 1942 to 2018 was 7.4%. Depending on which time period you look at, the long-term IAAR for the S&P 500 hovers between 6 to 8%.

But here’s a fun trivia question: During how many individual years from 1928 to 2018 did the S&P 500 deliver between 6 and 8% inflation-adjusted returns?

The shocking answer: Just two years!

In 1993 and 2004, the S&P 500 delivered 7.1% and 7.2% inflation-adjusted returns, respectively. In every other year since 1928, the index delivered returns outside of the 6-8% range.

As evidence, check out the chart below that shows the S&P 500 inflation-adjusted annual returns for every year from 1928 to 2018, sorted from best to worst:

Over the long haul, the S&P 500 has typically delivered between 6 to 8% returns, but it’s actually extremely rare for the index to deliver these type of returns in any given year.

How Often Does the S&P 500 Deliver Average Returns Over Longer Periods?

The fact that the S&P 500 doesn’t deliver between 6 to 8% returns each year shouldn’t scare investors who have a long investment time horizon.

In some years the index will deliver positive returns. In other years, negative. The longer your investment time horizon, though, the higher the likelihood that you’ll experience positive returns.

To illustrate this, check out the chart below that shows every 10-year inflation-adjusted annualized return for the S&P 500 since 1928, sorted from best to worst:

During the best 10-year period, the S&P 500 delivered nearly 18% annualized returns and during the worst period it delivered -3.8% annualized returns.

In 68% of all 10-year periods, the S&P 500 delivered 4% annualized returns or higher.

Let’s check out the annualized returns for all 20, 30, and 40-year periods as well:

During the best 20-year period, the S&P 500 delivered 13.2% annualized returns and during the worst period it delivered 0.6% annualized returns.

In 74% of all 20-year periods, the S&P 500 delivered 4% annualized returns or higher.

During the best 30-year period, the S&P 500 delivered 10.1% annualized returns and during the worst period it delivered 4.3% annualized returns.

During the best 40-year period, the S&P 500 delivered 8.8% annualized returns and during the worst period it delivered 4.2% annualized returns.

Investing for the Long Haul

In this post we saw something profound: During individual years, the S&P 500 has delivered anywhere from -38.1% to 53.6% returns. During 40-year periods, though, the S&P 500 has delivered between 4.2% and 8.8% annualized returns.

The charts below show this massive difference:

During individual years, you can get a wide variety of market returns. Over 40-year periods, though, your variation in returns is much smaller and your odds of earning positive returns are much higher.

This is important for investors to remember: When you invest in a stock market index fund, you’re actually unlikely to earn “average” returns in any given year. The longer you hold your investments, though, the higher the likelihood that you will earn positive returns.


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Here’s How the S&P 500 Has Performed Since 1928


Zach is the author behind Four Pillar Freedom, a blog that teaches you how to build wealth and gain freedom in life.

Zach's favorite free financial tool he's been using since 2015 to manage his net worth is Personal Capital. Each month he uses their free Investment Checkup tool and Retirement Planner to track his investments and ensure that he's on the fast track to financial freedom.

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