Stock Market Average Returns - Are They Important?
The saying is so often repeated that even newcomers know it. Over time, the average stock market return is 10% annually. This seems to suggest that if you're investing in the stock market, you will earn 10% if you can just stay in the market long enough. The problem with a statement like that is incompleteness of thought and downright deceptiveness. The stock market average return is 10% annually? Let’s discuss this statement and its implications further.
Put Your Money Where Your Mouth Is
Maybe the people saying it are promoting a new e-book or they just don’t know any better. In any case, this statement purports the idea that if you can only buy a few (or maybe only one) stocks you are going to achieve that famous 10%. That is some really good Wall Street news! Oh, by the way, which stock was that?
It's sad but true that there are people who really believe in this mythical 10% stock market average return investment philosophy. For that matter, what really are stock market average returns? What is your definition of the market? If it was the S&P 500 in 2004, it didn’t even make it. Mutual funds? The same year neither the Russell 3000 nor the Russell 500 made it.
The Truth About Stock Market Average Returns
The flaw in the entire discussion is that the performance of “the market” doesn’t matter; what matters is the performance of the investments in your stock portfolio. If you make a 100% return on your portfolio, you had a great year regardless of the S&P 500. If the Dow made 2% and you beat it with 2.5%, did the net result in your portfolio really give you something to brag about?
For successful traders, the only comparison necessary is your bottom line. Comparing average stock returns against the NASDAQ is fun and it gives you something to brag about to your buddies, but it means nothing to your investment portfolio.
How To Quantify Your Stock Market Average Returns
Remember, you’re not buying “the market” so any comparison with the market indexes is purely for entertainment purposes. It’s time to dust off your stock trading plan and go from there. What are your goals for your investing? If you are looking at long term investing, your approach will rely on good returns but also strong investments that likely include dividends. In addition, you can supplement your income with options trading. If you are near retirement age you will likely take a more conservative approach than someone in their 20s or 30s who has time to rebuild their account if they run into problems.
The analysis of stock market average returns is to determine which types of equities should be the focus of your investing in order to get to where you want to be financially. At the end of each quarter or at the end of the year you can ask yourself if your performance in the stock market is meeting your goals.
The stock market is a great tool for meeting your financial goals and dreams but it must be approached like a business. Careful planning, fundamental analysis and frequent review of your performance against your goals are always better than dwelling on average market returns. For investors who are building for the future the key is to buy stocks from solidly performing companies and let someone else try to find out where the mythical 10% went!