People invest in the stock market because they want to grow their wealth. Yet, not everyone understands what that means in context. How much should you expect to gain through your investments each year? What is the average return on stocks?

This is a complex question. For starters, the stock market doesn’t return the same amount each year. Your return on investment also depends on what type of securities you invest in. There are also considerations for how long you’re invested. All told, every person’s return will be different. This is why it’s so important to have an average to benchmark against. 

Here’s a closer look at the historical return of the stock market, and what you can expect in terms of a true average return on stocks. 

Historical Return on Investment

The stock market as we know it today was established in 1792, but analysts have really only tracked market returns for the last 100 years or so. The aggregate average return over that time? A nice round 10%. 

What does a historical 10% actually mean? It means that if you invested in an S&P index fund, you could reasonably expect about 10% returns each year in a vacuum. Now, as we all know, the stock market doesn’t operate in a vacuum. So, what this 10% historical return actually represents is an expected return. Some years, the market may fall short. Other years, it’s likely to exceed a 10% return. Over a long enough time period, however, expect about 10% return on investment. 

Consider Incremental Return Over Time

The 10% stock market average is a figure accounted over roughly a century. However, if you look at a stock chart over the past 100 years, you’ll see a pattern of exponential growth. The market has, in fact, grown at a more rapid pace in recent years. This makes calculating average return on stocks a bit trickier. 

To get a feel for a true average in the current market, it’s best to look at historical return over specific increments of time. For example, looking backward from 2021:

• The year-to-date average return of the market is ~23%.
• Five-year average return on stocks is roughly ~15%.
• 10-year average return on stocks is about ~14%.

As you can see, the greater the time period, the closer to the mean the average return becomes. This has to do with the natural ebb and flow of the market over time. For example, the 100-year historical average factors in years like 1929, when the market lost roughly half its value. However, it also factors in years like 1995, when the market returned almost 37% to shareholders. 

By looking at incremental stretches of time and the average return over these years, investors can get a better example of how recent averages stack up against historical ones. 

Security Type Affects Total Return

Another important factor to remember about a 10% average is that it’s a broad market average. It accounts for total market return. This is an accurate benchmark if you invest in a broad-market index fund. However, if you invest in a specific sector or type of security, you’ll need a different benchmark.

For example, growth stocks tend to live up to their name, returning many multiples of growth over a few years. Take a company like Block (NYSE: SQ), which returned 1,091% to shareholders from 2017-2021. Stack that up against a defensive investment in a Dividend Aristocrat like 3M (NYSE: MMM), which has actually lost about 2% over the same time period. Both stocks are darlings on Wall Street, but for different reasons. And, their returns show up in very different ways. 

To understand how the type of security affects the return you can expect, you’ll need to calculate Total Return (TR), which factors in all forms of capital gains, including dividends. 

Track the Real Rate of Return

One of the best practices for any investor is to track their current rate of return against the market’s current performance. If you’re indexed, the numbers should be the same, indicating that you’re pacing the market. For those seeking to beat the market, consider a few indicators:

• Has your portfolio as a whole outgained the market, or is it just a few stocks?
• Have your gains outpaced the market or are they sporadic and recent?
• What is your TR vs. the market’s current rate of return?
• What percentage above the market’s return is your portfolio?

Often, investors simply stack up their portfolio’s unrealized gains vs. the market’s growth. This, unfortunately, doesn’t account for several important factors. To get a clear comparison, you need to account for Real Rate of Return, as well as TR. Factor in inflation, taxes, fees and any other costs that still need to come out of your unrealized gains. Then stack it up against the market. 

If the market averages 10% return and your portfolio holds steady at 12%, you might think you’re beating the market. But, if taxes and fees trim 4%, you’re actually lagging the average. Track the Real Rate of Return and the Total Rate of Return to see if you’re truly beating the average. 

Remember, the Market is Dynamic

10% is a nice round number that anyone can understand as they seek to pace or beat the average return on stocks. But it’s important to look at real numbers to get a sense of how well the market is actually performing. If the market is down 4% and you’re up 5%, you’re still beating the average, if only for that day, week or month. Monitor your portfolio’s performance against contextual averages to truly track its performance and your return on investment.