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Updated on Wednesday, November 21, 2018
Most people know that investing money is an important component of long-term financial success. However, the stock market can seem overwhelming to a new investor.
Before you decide whether investing in stocks is the right choice for your financial future, familiarize yourself with the long-term trends of the market. Educating yourself about the average stock market return is vital to responsible investing. A better understanding of these long-term trends should help make buying your first stock easier.
Average stock market returns over time
In order to measure the changes in the stock market, investors typically refer to the S&P 500. The S&P 500 is a collection of the 500 largest publicly traded companies in the U.S. based on market value.
If you’re an investor, it’s unlikely that your portfolio will mimic the exact pattern of the S&P 500. In order to create the exact same returns, your portfolio would need to include each of the 500 companies included in the index. However, it’s not necessary or practical to invest in all 500 companies individually as a new investor. Instead, the wide scope of the S&P 500 can be used as a relatively accurate benchmark for the market as a whole. This information can allow you to make more informed investment decisions.
Since 1928, the S&P 500 has had an average annual return of 11.53%. Over the last 50 years, the average S&P 500 return was nearly the same: 11.65%. Look at a shorter time frame, however, and the average return decreases. Over the last 10 years, the average stock market return was 9.83%.
When you look at the broad overview of the S&P 500, the average return seems to grow consistently. However, that growth is not guaranteed.
Don’t count on earning the average return
Even though the average stock market return seems to show consistent growth, you should not plan on earning the average annual return each year.
The average trend of the stock market is to increase over time, but that’s not always the case on a year-to-year basis. For example, in the midst of the Great Depression, the annual return of the S&P 500 dropped to -43.84% in 1931. In 1954, by contrast, the annual return of the S&P 500 increased to 52.56%. Investors could not easily predict these swings.
Due to this unpredictability, it’s possible that you could lose money, especially in the short term. In fact, it’s likely that your investments will experience a dip at some point. However, that’s the nature of the market. Before you invest your money, prepare yourself for the inevitable drops.
As you look at the stock market returns by year, also consider other factors that will affect your overall gains. Inflation can diminish the value of your returns, for example, and investment fees can physically cut into your returns. The results of both lead to a decrease in purchasing power.
How to invest wisely
Even with the fluctuations in the market’s returns, it may be a good idea to invest your money. If you are investing your hard-earned money in the stock market, then you will want to know how to maximize your money. The goal of investing in the stock market is to have your money work for you.
Here are some guidelines to keep in mind when creating your investment strategy.
Invest for the long term. While you do have the option to invest your short-term savings, the unpredictable fluctuations in stock market returns could create losses. In theory, these fluctuations likely would average into long-term growth over time. However, if you invest your money for only a few years, then there’s a greater chance you could experience poor returns.
Don’t panic. When the market drops, it can be extremely tempting to sell. Rather than lose the rest of their investments, some investors may instinctively get rid of their stocks when there is a downturn in the market. However, selling out at every dip in the market likely will negatively affect your long-term gains.
Avoid high fees. It’s an unfortunate reality: Fees are a part of investing. You can limit your fees by choosing an investment firm that consistently offers low fees. Vanguard and Fidelity, for instance, are reputable investment firms known for their low fee structures. Shop around and compare costs before deciding which firm will manage your investments.
Balance your portfolio. As you progress through life, your goals and needs will change, so it’s important to balance your portfolio with the appropriate amount of risk along the way. For example, younger people often carry more risk in their retirement portfolios; if the market takes a tumble, they have decades to wait for it to recover before they’ll need to use that money. As you inch closer to retirement, however, you may decide to reduce your investment risks since you plan to use the money sooner.
The best way to start investing is to save up for an initial investment. Your savings goal will depend on which firm you choose to work with because some will have higher investment minimums than others. Once you have saved your initial investment, you can take the leap into investing.