# 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$.

vurtil opmerso much fantastic information on here, : D.

Alan PetersonI am a dual Canadian/U S citizen. Is there a withholding tax that IRS takes from the interest earned on a TFSA or do I calculate the interest I would have earned on an accural basis and complete a form which lists the investments and the actual tax that should been paid on the interest? Does the IRS collect tax on the total interest that should have paid or only a percentage of those funds are owed?

Thank you.

PFCI’m not an accountant by trade, but my understanding is that a dual citizen you will have to file taxes in the US, and from the perspective of the IRS a TFSA is not considered a retirement account.