If you are contemplating investing in the stock market anytime soon, you would be well-served to do a little research about the market and your money. It might also behoove to enlist the services of an financial or investment adviser.
The bottom line is you want to do all you can to make sure you are putting your money to work in all the right places. When you get right down to it, you’ll want to be able to monitor your success as an investor in terms of how much money your are able to make on the amounts you invest. In the finance, investment and accounting communities, success is measured by something called “Return on Investment” or ROI.
As an investor, you surely have expectations regarding how much you want to make and how much you expect to make from your stock investments. The information below should serve as guidelines as to setting your expectations moving forward.
What is a Good ROI?
When it comes time to decide where you are going to invest your money for the future, you owe it to yourself to maximize your earnings. The truth is you have a wide range of investment options, though some of them offer higher returns than others.
For instance, real estate usually offers a decent return over any 10−year period. There’s two issues that warrant consideration when investing in real estate. First, there are plenty of ups and downs. The secret to getting a decent return over a 10−year period with real estate is having enough patience to ride out the bad time. If someone has that ability, there’s a reasonable chance their real estate investment portfolio could return them as much as 50%−75% in that time-frame, depending on things like location and investment amount. That’s actually a pretty good overall ROI, though it only represents 5% to 7.5% a year on average.
The other issue has to do with the possibility of asset damage that could greatly diminish the value of the asset. Even with insurance, there’s a certain amount of exposure one has when they invest in real estate.
Yes, investing in the stock market certainly subjects investors to ups and down as well. They also have exposure to stock investments gone bad due to circumstances like company mismanagement or sudden changes in market forces. Still, stocks hold the potential of providing a pretty good ROI year−over−year if the investor closely manages their portfolio and employs some auxiliary investment strategies to optimize income.
Let’s look at some specific numbers to help set your expectations. By the way, you should know there are strategies available that will allow you to make money in the stock market even when stocks are generally trending downwards.
Stock Market Average ROI
The best way to determine the average amount stocks return over any extended period of time is to look at popular stock indexes like the S&P 500. Using such indexes requires the viewer to assume investors have a balanced portfolio that’s not unduly weighted towards a particular industry. If you are interested in only investing in one industry, you would want to research performance data for that particular industry.
Assuming you take a conservative approach and invest in a balance portfolio, you’ll be happy to learn the S&P 500 indicates the market has provided an annual average ROI of 10.2% percent (with dividends included) from 1957 to 2018. Adjusted for inflation, the number is 6.3%, certainly in line with real estate.
The Best Ever Stock Market ROI
To give you an idea of what’s possible on a year-to-year basis, we again look at the S&P 500. From 1975 to 2018, the market’s best performance came in 1995 with a 34.11% ROI. It’s worth worth noting that from 1995 through 1999, the S&P 500 rose from 459.27 to 1,469.25. That’s an incredible 5-year ROI of 220%. It doesn’t get any better than that.
The Worst Ever Stock Market ROI
Of course, what goes up must come down to some extent. With that in mind, we see that the largest annual loss by the S&P 500 came in 2008 with a loss of 38.49%. That number should not surprise anyone, considering 2008 was the first year of one of the worst recessions in US history.
It’s impressive to note that since 1975, the S&P 500 has only recorded back-to-back annual losses exactly one time. In fact, the S&P 500 gave ground for three consecutive years from 2000 to 2002, due in large part to the 5-year run-up over the prior 5 years, plus the internet bubble bursting. The loss over those 3 years totaled about 40%.
What is the Average ROI for Stocks
We have already looked at the average gains in the S&P 500 for a 61-year period. If you are interested investing in specific stocks, the information about the stock’s performance over a specific period is available. It would be a really good idea for you to use those numbers when choosing where to invest your money.
As a rule of thumb, you would do well to target a 10% annualized ROI from your stock portfolio. If you select stocks that show those kinds of average returns over an extended period, that 10% number should be attainable. Remember, the overall market says the number is good as long as you don’t isolate short periods of time.
With the knowledge you now have in your investment mind, you should be able to set reasonable expectations for your stock investment portfolio. As long as you stay the course with good stocks, you should be able to adequately plan for the future.