Numerous online financial content creators claim that stocks can be expected to return an average of 10 to 12 per cent a year. This belief is misguide

Do stocks return 10 to 12%, on average? No, and that’s a dangerous assumption

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2024-03-29 13:30:06

Numerous online financial content creators claim that stocks can be expected to return an average of 10 to 12 per cent a year. This belief is misguided, and can lead to some questionable advice.

Assumptions about expected stock returns can affect how much people decide to save, how they allocate their assets, and how they choose between alternatives such as investing or paying off debt. Small differences in expected returns can make big differences in financial decisions.

Before debunking it, it’s important to understand the origin of the idea that stocks return 10 to 12 per cent. Going back to 1950 through 2023, U.S. stocks have delivered a nominal – before inflation – return of 11.32 per cent, as measured by the Fama/French Total U.S. Market Research Index, or 11.43 per cent, as measured by the S&P 500.

For the 20 years ending December, 2023, the total U.S. market returned an annualized 9.81 per cent, and the S&P 500 returned 9.69 per cent. The genesis of those often quoted 10-per-cent or higher returns is easy to see in recent U.S. data.