The average return of the stock market

You’ve probably tried using a retirement calculator to guess your net worth in 30 years. You plug in a few parameters – your investable assets, your monthly contributions, the expected return of your investments – and out pops some number that is either relieving or absolutely terrifying.

But what is the expected return of your investments? Often you’ll see 7% thrown around, but that number hardly seems certain. What if you had invested everything right before the Great Depression, or the dot-com bubble? Let’s take a closer look.

30 year CAGR of the S&P 500

This chart shows the compound annual growth rate (CAGR) of a 30 year investment in the S&P 500 for each year since 1917, adjusted for inflation.

Here are some quick observations:

• Even investors who went all in before severe market downturns were able to return ~5% annually
• The best year to invest was 1932, the bottom of the Great Gepression, when investors returned 10.56% annually over the next 30 years
• The worst year to invest was 1965, just before the Vietnam War and the inflation spike of the 80s, when investors returned just 4.36% annually over the next 30 years

Average return & variance

The results above map on pretty well to a normal distribution. The average CAGR works out to 7.20%, with a standard deviation of 1.54%. Roughly speaking, this means two times out of three you can expect an investment in the S&P 500 to return between 5.7% and 8.7% over a 30 year time period.

Conclusion

This little experiment should give you a better idea of the average return of the stock market, but it has some limitations. For starters, if you’re investing in the S&P 500 through ETFs you’ll need to remove about ~0.10% from your expected return due to management fees, and another ~0.30% in withholding taxes if you’re trading outside of an RRSP.

In summary, I’d recommend trying the following numbers when playing around with a retirement calculator:

• Very conservative: 4% CAGR
• Conservative: 5.5% CAGR
• Neutral: 6.5%
• Optimistic: 7.5% CAGR
• Very optimistic: 9% CAGR

That certainly beats the returns of your savings account! If you’re just starting out and are looking to open a brokerage account, there’s no better option than Questrade. Purchasing ETFs with them is free, and you can buy and sell stocks for just 5$.