From through , the average stock market return was The returns can -- and do -- vary wildly from one year to the next, and an "average" year almost never actually generates the average return. Over that decade, only one year -- , up The catch? Nobody knows which years will be above or below average. This is where the one-year average is helpful only in setting the stage for stocks as good long-term investments.
And, while there are thousands more stocks trading on U. The market's results from one year to the next can vary significantly from the average. Let's use the period as an example:. To put it another way, six of those 10 years resulted in outcomes that were very different from the Of those six very different years, three generated significantly lower returns with one year, , resulting in losses , while three years delivered substantially higher returns.
Data source: MoneyChimp. It's worth highlighting the variance in annual returns from one year to the next versus the average. Since , here is a breakdown of the yearly results:. In addition to showing the average returns, the table above also shows useful information on stock returns adjusted for inflation.
If there's any one lesson we can take from the breakdown of annual results versus the average, it's that investors are far more likely to earn the best returns over long periods.
There's simply no reliably accurate way to predict which years will be the good years and which years will underperform or even lead to losses. But we do know that, historically, the stock market has gone up more years than it has gone down. The simple average of returns is an easy calculation, but it is not very accurate.
For more accurate calculations of returns, analysts and investors also frequently use the geometric mean or the money-weighted rate of return.
When looking at average historical returns, the geometric average is a more precise calculation. The geometric mean is always lower than the average return. One benefit of using the geometric mean is that the actual amounts invested need not be known. The geometric average return is sometimes called the time-weighted rate of return TWR because it eliminates the distorting effects on growth rates created by various inflows and outflows of money into an account over time.
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Between and today, you can see there have been up years and down years, but over this year period, those fluctuations have averaged out as a positive return.
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