What is the Rule of Thumb for Average Market Returns?
The annual return of the stock market has been estimated at around 10% since 1926. For this reason, it has been considered a benchmark when evaluating and targeting performance of long-term stock investments. Valuation rules or simple rules are helpful in financial planning as they provide an idea of whether you are on the right track. They are useful for making quick estimates and projections but may not always account for critical variables. Whether the 10% rule is a good benchmark for your market share depends on a variety of factors, including your risk tolerance and time horizon, among others.
Where Does This Rule of Thumb Come From?
The 10% rule reflects the historical average annual return of the stock market, which is typically measured by the performance of the S&P 500 index. This index tracks the performance of 500 of the largest companies in the United States across 11 sectors and represents the health of the market as a whole. Since the S&P 500 index was not introduced until 1957, the Standard and Poor’s 90 index was used prior to that.
How to Use the Average Stock Market Return
Since the 10% rule is based on decades of data, it includes many years where the stock market returned less than 10% (and some years where it returned more). For this reason, it should be used only for long-term planning purposes such as retirement savings or funding your child’s education. Through it, you can estimate how much investment you need to make initially and for subsequent investments, as well as how much you need to save annually to accumulate your target amount.
A Grain of Salt
There are several factors that can affect your returns. Perhaps the most important is your choice of investments, which will be influenced by your time horizon and risk tolerance. Management fees, expenses, and taxes will also affect your average, while inflation will reduce purchasing power and thus lower actual returns.
Source: https://www.thebalancemoney.com/rule-of-thumb-for-average-stock-market-return-5115017
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