What Is the Average Return on US Stock Investments?
Stock investment performance follows a cyclical pattern, with some periods generating double-digit returns offset by low or negative returns in other periods. The Standard & Poor's (S&P) 500 Index is a good proxy for gauging returns on U.S. investments. The S&P Index is comprised 500 of the largest corporations and is weighted by market capitalization (shares outstanding multiplied by share price).
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Historical Performance
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From 1926 to 2010, the S&P Index provided a compound annual growth rate (CAGR) of almost 10 percent to investors. In contrast, U.S. Treasuries returned about 5 percent to investors over the comparable period. Despite the outperformance of equity investments, there were prolonged periods of low or negative returns due to the volatility inherent in stock investments. For example, the stock market lost 22.6 percent of its value in the stock market crash of October 1987, and in 2008, stocks lost 37 percent of their value.
Total Returns
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A more comprehensive approach to analyzing returns is to also include dividends as part of the stock market's total return to investors. According to S&P, dividends comprised 44 percent of the stock market's performance over the last 80 years. If you were to reinvest all of the dividends back into the stock market, you would have earned a return of eight times. In order words, reinvesting $1 in dividends in 1950 would have produced nearly $800 in 2010.
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Inflation-Adjusted Returns
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Looking at inflation-adjusted returns means taking into consideration the effects of inflation on investments, which in some years took a toll on investor returns such as the high inflationary period of the 1970s. Typically, dividends have lagged inflation; however, during the 1970s and 1980s the differential was more pronounced. Thus, on an inflation-adjusted basis, $1 in dividends reinvested over the last 60 years produced a total return of $60 as compared to $800 excluding inflation.
Historical Performance By Decade
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The volatility of the stock market produced returns above the average of 9.8 percent offset by periods of low and negative returns. For example, the U.S. stock market produced a total inflation-adjusted return of 16.7 percent during the 1950s followed by a 5.2 percent return in the next decade. The 1970s and the period from 2000 to 2009 produced negative returns of 1.4 percent and 3.4 percent, respectively. From 1950 to 2009, the S&P index returned 7 percent to investors.
Performance By Sector
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Some sectors, such as the technology sector, can outperform the overall stock market by providing above-average returns to investors. For instance, in 1999, the information technology sector generated a return of nearly 80 percent as compared to the financial sector, which only produced a 3 percent return. While the technology sector may have shown a high reward, there also is a lot of risk, as demonstrated by the bursting of the "dot-com" bubble. In some years, a sector may lag others but rebound in other years, such as is the case with cyclical stocks.
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