According to Yahoo! Finance, the average return for common stocks since 1926 has been 10.5 percent. This amount includes both stock price growth and dividends earned. Keep in mind, however, that performance has varied radically from one decade to the next. In the 1950s and 60s, for example, the average return was around 15 percent, but the 1970s provided investors less than a 5 percent average rate of return.
Annual rates of return differ among different types of companies. Large companies, with billions of dollars in capitalization, are called large-cap or blue chip stocks. During the decade starting in 2000, blue chip stocks have earned just 4.3 percent annually, according to Bloomberg's Businessweek. Meanwhile, small-cap companies have done much better in recent years, returning an average of 9.69 percent during the same period.
Average Returns are Determined By Market Averages
Average rates of return are calculated based on market composites or indexes. An index is a group of stocks picked to represent various market sectors. Individual stocks can outperform or underperform market averages. Many mutual funds are designed to mirror market indexes, such as the S&P 500. These types of funds should earn the same average rate of return as the index they are designed around.
The stock market offers a good reflection of the economy. Free market economies are cyclical and they vacillate between times of economic boom and economic bust. In the stock market, times of boom are called bull markets and times of bust are called bear markets. Between 1929 and 2009, there were 14 bear market cycles lasting between one and 10 years each. The average rate of return for stocks will depend greatly on when you buy and on the severity of any bear market cycles that occur following your purchase.
Don't Forget Expenses
You can invest in stocks individually or you can invest indirectly by buying a mutual fund. In order to get the same rate of return as the market averages, it is necessary to buy a mutual fund designed to follow an index. Either way, there are expenses involved. There are brokerage fees, which reduce your rate of return when you buy individual stocks. Likewise, mutual funds have expenses that impact the average rate of return. Expenses will vary from broker to broker and with different mutual funds.
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