Average Investment Returns 2023 Explained in Simple Terms

Investing can be intimidating, but understanding average investment returns can help you make informed decisions. Historically, stocks have provided higher returns than bonds.

In the past, investors have seen average annual returns of around 7-8% from stocks, while bonds have offered around 4-5%. This is a general trend, but keep in mind that past performance is not a guarantee of future results.

The key is to understand that investment returns can vary significantly over time, and it's essential to have a long-term perspective.

For another approach, see: Self Storage Investment Returns

The top 10 companies in the S&P 500 contributed about three-quarters of the index's gains in 2023. This concentration can magnify both gains and losses, making it essential to have a long-term perspective.

Investors are far more likely to earn the best returns by investing for the long term, rather than trying to time the market or make short-term trades. The S&P 500 has gained value in approximately 40 of the past 50 years, generating an average annualized return of 9.4%.

The average stock market return is around 10%, but it's essential to understand that this includes down years as well as up years. A good rule of thumb is to use an average annual return of 6% when estimating future returns.

If you're looking to build wealth, investing in stocks is an excellent place to start. However, to get the best returns, use the method that's tried and true: Buy great stocks and hold them for as long as possible.

The S&P 500's top stock was over 500 times the value of the 75th-percentile stock in 2023, a level of concentration not seen since 2000, just before the dot-com bubble popped.

Here's a breakdown of the average S&P 500 returns by year over the last few decades:

By looking at these numbers, you can see that the stock market has had its ups and downs over the years, but the long-term trend is generally upward.

Investment risk is a reality that investors face. In fact, there's a roughly 1-in-4 chance of losing money in stocks in any given year, with 25 years out of 94 covered by Damodaran's data seeing a decline in value.

Some years are worse than others, with 19 out of those 25 years experiencing a loss of more than 5%. The dot-com crash and the Great Recession are examples of particularly difficult periods for investors.

Despite the risks, the long-term returns are impressive, with an annualized return of 10% over the long-term. In almost 60% of the years covered, returns were greater than 10%, giving investors a better than 1-in-2 chance of double-digit gains during any given year.

Take a look at this: Investment Returns Definition

The rarity of certain years' returns is a key factor to consider when evaluating investment risk and reward.

Outliers can significantly skew the annual average return, making it a less reliable indicator of stock market performance.

In the last 20 years, the average return was 9.75%, which may seem low compared to the 12.39% return for the last 10 years.

There were indeed some exceptional years, like 2003, when the return was a whopping 26.38%.

Negative outliers also played a role in bringing down the 20-year average.

Investing in the stock market can be a rollercoaster ride, with some years delivering spectacular gains and others resulting in significant losses.

One in four years, or roughly 25% of the time, the value of S&P 500 investments actually drops. This is based on data from 94 years, where 25 years saw a decline in value.

The dot-com crash and the Great Recession were particularly harsh on investors, with some investments losing as much as 5% or more in a single year. In fact, 19 out of 25 years with declines saw losses exceeding 5%.

However, the good news is that there are many winning streaks to balance out the losses. In almost 60% of the years covered in the data, returns were greater than 10%, giving investors a decent chance of double-digit gains.

Here's a breakdown of the years with significant losses:

Keep in mind that even with reinvested dividends, some investments can still decline in value over time. A $100 investment in 1928, for example, dropped to around $142,000 by 2019, after initially jumping to over $155,000 by 1999.

Investing for the long term is a tried and true method, as seen in the S&P 500's historical gains in approximately 40 of the past 50 years.

The average annualized return of 9.4% is a testament to the power of long-term investing. Historically, the stock market has gone up more years than it has gone down.

Investors who try to predict short-term peaks and bottoms often end up with below-average returns. This approach requires more time and effort, and can lead to higher fees and taxes.

Buy-and-hold investing is the way to go, as it allows you to focus on buying high-quality stocks and holding them for many years. The evidence is clear: this strategy yields the best returns.

On a similar theme: Bear Returns

The long-term average annual returns from the S&P 500 over the last century is about 10.06%, but after adjusting for inflation, the real return drops to about 6.78%. This means that while your money is growing, its purchasing power isn’t increasing as much as the headline number suggests.

Inflation can significantly impact investment returns, and it's essential to consider it when evaluating your portfolio. The difference between nominal and real returns can be substantial over time.

To put this into perspective, a $100 investment in the S&P 500 at the beginning of 1973 would have grown to about $18,940.81 by the end of 2024, a return on investment of 18,840.81%. However, when adjusted for inflation, the cumulative return is approximately 2,567.20%, or 6.59% per year.

Here's a rough breakdown of the returns on different investments over the same period:

Investing in stocks has consistently outperformed other investment options over the long-term. A $100 investment in 1928 would be worth nearly $750,000 by the end of 2021.

The power of compound interest is a key factor in this growth. By the mid-1950s, that same $100 investment would have grown to $1,000, and by the mid-1980s, it would have reached $10,000.

In contrast, investing in U.S. Treasury bonds would have yielded about $8,500, while corporate bonds would have netted around $55,000. Real estate, on the other hand, would have returned a relatively modest $5,000.

To put this into perspective, if you had invested $100 in 1928, you would have earned a staggering return of nearly $7.5 million over the past 93 years.

The S&P 500's long-term average annual returns are only part of the story, with a real return of about 6.78% after adjusting for inflation.

The difference between nominal and real returns is significant, with the S&P 500's average returns dropping from 10.06% to 6.78% when adjusted for inflation.

In 1973, if you invested $100 in the S&P 500, you would have about $18,940.81 at the end of 2024, with an inflation-adjusted return of approximately 2,567.20% cumulatively.

Stock market returns are typically much higher or lower than the average, with only eight instances of returns between 8% and 12% over nearly 100 years of data.

The average stock market return of the S&P 500 is about 10% annually, but only 6% to 7% when adjusted for inflation, highlighting the importance of considering inflation in investment returns.

Intriguing read: Why Invest in Equity Market

Investment time horizons are crucial to understanding average investment returns. A long-term approach can help calm nerves during market fluctuations.

The S&P 500's average annual return is around 10%, but year-to-year returns can vary significantly. In fact, the 5-year return was 15.36% as of the end of 2023, while the 20-year return was 9.00%.

To put this into perspective, consider the following timeframes and their corresponding returns: TimeframeAverage Annual Return5 years (2019-2023)15.36%10 years (2014-2023)11.02%20 years (2004-2023)9.00%

Intriguing read: Who Is Required to File a Tax Return 2023

The stock market has a history of balancing out and experiencing positive growth overall, with returns increasing around 70% of the time.

This means that if you're investing in the stock market, you can expect it to bounce back from a downturn, as it did during the dot-com bust and financial crisis. Historically, the market has a way of evening out the average return on stocks for investors.

A stock market correction occurs when share prices peak and then drop by 10% or more, but the market will often correct itself by dipping. This can be a good time to invest, as the market will eventually recover.

There's no way to guarantee a certain stock market return, and numerous factors affect stocks' performance, making it difficult to accurately predict how a stock will perform.

Additional reading: Value Investing Stocks

Investing for the long term can be a powerful strategy, but it's essential to understand what that means. Historically, the S&P 500 has gained value in approximately 40 of the past 50 years, generating an average annualized return of 9.4%.

If you're looking to double your investment, a common rule of thumb is the rule of 72. This states that you can know how long it'll take for your investment to double by dividing 72 by the rate of return. For example, a 10% annual return means your money should double every 7.2 years.

Investors who have historically doubled their investments in the S&P 500 have done so in an average of about seven years each time, according to NYU business professor Aswath Damodaran. However, this can vary significantly, with some cases taking only three years and others taking over two decades.

To give you a better idea of what this means in practice, let's consider an example. If you had put $10,000 into an investment with a 10% annual return in the year 1995, you would have had roughly $20,000 by 2002, $40,000 by 2009, and $80,000 by 2016.

Here's a rough estimate of how long it might take for your investment to double at different rates of return:

Keep in mind that these are just rough estimates and actual results may vary.

Long-term investing is powerful, but it's essential to understand what "long term" means. It's not just a few years, but rather decades.

The S&P 500's price returns over different timeframes show that while the market has a long-term average annual return of 10%, year-to-year returns can vary significantly. For example, the 5-year return was 15.36%, while the 30-year return was 9.67%.

Investors who retired between 2000 and 2002 learned a painful lesson about the importance of time horizons. If you need money in the next five years or so, it's best to avoid aggressive investment in the stock market.

The table below shows the S&P 500's price returns over different timeframes, as of the end of 2022:

Over the long haul, you can expect your investments to grow at about 10% a year, doubling every seven years or so.

Investing in the S&P 500 can be a great way to diversify your portfolio, but it's essential to understand that the returns are heavily influenced by a few major companies.

In 2023, the top 10 companies in the S&P 500 contributed about three-quarters of the index's gains. This concentration of influence can magnify both gains and losses, making it crucial to be aware of the potential risks.

During the 2022 tech sell-off, these same top 10 companies accounted for a disproportionate share of losses, resulting in the index losing over 18% in value that year.

The concentration of influence in the S&P 500 has reached alarming levels, with the last time the index had a company at over 500 times the value of the 75th-percentile stock being in 2000, just before the dot-com bubble popped.

This level of concentration is not unique to market capitalization; it's also evident in earnings, where the top companies are far larger than the rest.

Here's a rough breakdown of the concentration in the S&P 500:

This concentration of influence has significant implications for investor returns, making it essential to understand the potential risks and rewards associated with investing in the S&P 500.