The average stock market return, measured by the S&P 500, is roughly 10% per year before inflation. After adjusting for inflation, that drops to about 7% per year in real purchasing power. These figures represent long-term averages spanning several decades, and individual years rarely look anything like the average.
What “Average Return” Actually Means
When people cite the stock market’s average return, they’re almost always referring to the S&P 500 index, which tracks 500 of the largest publicly traded U.S. companies. Over periods stretching back to 1926, the S&P 500 has delivered an annualized return of approximately 10% per year, including both price gains and reinvested dividends.
That 10% figure is a nominal return, meaning it doesn’t account for inflation. Since prices for goods and services rise over time, a dollar earned in the market 20 years from now won’t buy as much as a dollar today. Between 2000 and 2023, for example, inflation averaged about 2.2% per year, enough to turn $100 worth of goods into $165 over that stretch. Subtracting long-term average inflation from the nominal return gives you a real return of roughly 6% to 7% per year. That’s the number that reflects actual growth in your purchasing power.
Why Individual Years Look Nothing Like the Average
The 10% average is smoothed across decades. In any given year, the market might soar 25% or drop 35%. Calendar-year returns for the S&P 500 have ranged from gains above 50% to losses exceeding 40%. The market has finished positive in roughly three out of every four years historically, but the negative years can be steep enough to test anyone’s patience.
This volatility matters because your personal return depends heavily on which years you happen to be invested. Someone who put money in at the start of 2009 and held for a decade saw returns well above 10% annually. Someone who invested at the peak in 2007 and checked their balance 18 months later was staring at a loss of more than 50%. Both investors could eventually reach the long-term average, but only if they stayed invested long enough for the math to work in their favor.
Annualized Return vs. Simple Average
There are two ways to calculate an “average” return, and they produce different numbers. A simple average (also called arithmetic mean) adds up each year’s return and divides by the number of years. An annualized return (also called compound annual growth rate, or CAGR) tells you what single, steady rate would have turned your starting balance into your ending balance over the same period.
The annualized figure is always lower than the simple average because of a concept called volatility drag. If you lose 50% one year and gain 50% the next, your simple average return is 0%. But your actual balance is down 25%, because you gained 50% on a smaller base than you started with. The roughly 10% figure most often quoted for the S&P 500 is the annualized return, which is the more honest measure of what your money actually did.
How Time Horizon Changes the Picture
Over any single year, stocks are unpredictable. Over 10 years, the range of outcomes narrows significantly. Over 20 or 30 years, the S&P 500 has never produced a negative annualized return in any rolling period going back to the 1920s. That doesn’t guarantee the future, but it explains why long time horizons are central to stock investing.
The practical takeaway: the 10% average is a reasonable planning assumption for money you won’t touch for 20 or more years. For money you’ll need in five years or fewer, the range of possible outcomes is wide enough that using 10% as a target would be misleading. Short-term returns can land anywhere.
What Dividends Contribute
A meaningful chunk of the market’s long-term return comes from dividends, not just rising stock prices. Historically, dividends have contributed roughly 2 to 3 percentage points of the S&P 500’s total annual return, though that share has shrunk in recent decades as companies have shifted toward stock buybacks. Today, the S&P 500’s dividend yield sits closer to 1.3% to 1.5%.
When you see return figures quoted for the S&P 500, make sure you know whether they include dividends. “Price return” tracks only the change in stock prices. “Total return” includes reinvested dividends. The 10% long-term average is a total return figure. The price-only return is meaningfully lower, and using it would understate what investors actually earned.
How Fees and Taxes Reduce Your Return
The 10% average is a gross figure before any costs come out of your pocket. In practice, you’ll pay something to access the market. If you invest through an S&P 500 index fund, expense ratios can be as low as 0.03%, which barely dents your return. Actively managed funds often charge 0.50% to 1.00% or more, which compounds into a substantial drag over decades. A 1% annual fee on a portfolio earning 10% doesn’t just cost you 1% of your return. It costs you 1% of your growing balance every year, which over 30 years can reduce your final wealth by roughly 25% compared to a low-cost fund.
Taxes take another bite. In taxable accounts, you’ll owe capital gains taxes when you sell shares at a profit and income taxes on dividends. In tax-advantaged accounts like a 401(k) or IRA, those taxes are deferred or eliminated, which is one reason retirement accounts are so effective for long-term investing. After accounting for fees and taxes, your net return will typically land somewhere between 6% and 8% in nominal terms, depending on your cost structure and tax situation.
Using the Average for Financial Planning
Financial planners commonly use a 7% nominal return (or about 5% real return) as a conservative planning assumption for a stock-heavy portfolio. This bakes in some cushion below the historical average to account for fees, taxes, and the possibility that future returns may be lower than the past.
If you’re running a retirement calculation, that 7% figure applied over 25 or 30 years gives you a reasonable estimate without being recklessly optimistic. For context, $500 per month invested at 7% annually for 30 years grows to roughly $567,000. At 10%, that same contribution grows to about $987,000. The gap between those two numbers shows why getting the assumption right matters, and why building in some margin of safety is worth doing.
Keep in mind that the stock market is just one asset class. Most portfolios also hold bonds, which have historically returned 4% to 6% per year, pulling the blended return of a balanced portfolio below the pure stock average. A classic 60/40 stock-bond portfolio has historically returned roughly 8% to 9% nominally, or around 5% to 6% after inflation.