What is the Average Stock Market Return and How to Beat It!

What is the Average Stock Market Return and How to Beat It!


After a decade-long bull market, what can
you really expect from the market? What’s the average stock market return? In this video, I’ll show you the history
of bull and bear markets to find that reasonable return. We’ll look at what’s caused stock market
crashes in the past and more importantly, what investment returns you can expect from
the future. We’re talking stock and investment returns
today on Let’s Talk Money! Beat debt. Make money. Make your money work for you. Creating the financial future you deserve. Let’s Talk Money. Joseph Hogue with the Let’s Talk Money channel
here on YouTube. I want to send a special shout out to everyone
in the community, thank you for taking a little of your time to be here today. If you’re not part of the community yet,
just click that little red subscribe button. It’s free and you’ll never miss an episode. The market is crazy lately and I’m not talking
about the up-and-down roller coaster we often see with stocks, I’m talking the expectation
that the good times will last forever. Over the last ten years, stocks have more
than doubled and only with a couple small corrections along the way. The financial pundits are again telling people
to expect double-digit returns and nobody is questioning their sanity. This is exactly the point where you want to
take a look back for a little reality check. Now I’m not calling for a stock market crash
or even trying to predict a recession. What I want to do in this video is just give
you a realistic idea of average stock market returns, bull and bear markets and what you
can expect from investing. Not trying to rain on your party. I’m really not trying to be the pessimist
but I do want to do two things here. First is by giving you a realistic expectation
of investment returns, you’re going to be able to better plan how to reach your goals. You see, a lot of people expecting those 10%-plus
returns to go on forever are going to be disappointed when returns fall short and they haven’t
saved enough. You’re going to be able to see exactly how
much you need to save even on the more realistic returns. Second though, is by readjusting your expectations
on returns for stocks, I’m hoping to keep you from the bad investing behaviors that
kill a portfolio. Knowing what’s realistic for stocks, bonds
and real estate returns, you’re less likely to chase after the hot stocks and then panic-sell
when they don’t live up to the hype. So let’s look first at this data by Mackenzie
Investments on a composite S&P and TSX index, so this is data on US and Canadian stock markets. We’ll look at some bear markets going back
to the 1930s but I like to use the broader data back only to 1956 for a more modern perspective
on the markets. There have been 12 bull markets since ’56
though there’s some argument whether the 2001 gain was a real bull market or just a
quick bounce in the 2000 crash. On average, stocks have jumped 129% from the
low of the previous bear market and have rallied for 54 months. Now on that last point, it does seem like
bull markets are lasting longer than they have in the past. Five of the last seven bull markets have all
been over that 54-month average so the number could be skewed a little low by older data. There have also been 12 bear markets of a
20% drop or more since 1956 with stocks falling an average of 28% and for that plunge in prices
lasting an average of nine months from the previous highs. So a couple of points to get from this graph
before we look at what’s caused bear markets and average returns going forward. First is that the current bull market is definitely
not typical. Ten years of almost straight-up stock prices
is a long time to go without a hiccup. Even if we consider bull markets are getting
longer, ten years is more than double the longer-term average length. Also though, that 176% return since 2009 might
be above the average bull market but isn’t what you’d expect from a ten-year old bull. It’s one of the things the optimists have
pointed out for why the market can keep going, saying that stocks haven’t exactly boomed
like they did in the 90s so there isn’t that sense of euphoria you usually get before
a crash. But if bull markets don’t die of old age,
what does cause a crash? What are the factors that usually bring a
stock market crash and are they a threat to returns now? Recessions and just the fear of a slowdown
in the economy are the most common reason for a stock sell-off. More than half the past 12 bear markets have
been caused by an outlook for negative economic growth and unemployment. On this one, we don’t seem to be in too
much trouble just yet. Unemployment is still at historic lows and
wage pressures aren’t to the point where they’re hurting corporate profits and driving
layoffs. There is some worry about manufacturing and
recent surveys point to a slowing industrial sector in the US but it’s not bled into
the rest of the economy. The biggest warning signs are the developing
trade war and its potential affect on consumer prices but no real sirens yet. Extreme stock valuations have caused bear
markets in 1981, ’87 and the 2000 dot com crash. Stocks are an ownership of future profits
so the value is tied to those expected cash flows. Normal would be for stock prices to rise about
at the rate of earnings growth. Now when investors get over-excited, stock
prices detach from that intrinsic valuation. This chart from FactSet shows the forward
price-to-earnings ratio for the S&P 500 and the 11 stock sectors it tracks. Now most of the time you hear price-to-earnings,
you’re looking backwards so stock prices divided by corporate earnings over the past
year. This forward PE ratio is the stock price divided
by earnings analysts are expecting for stocks in each sector and for the market as a whole
over the next year. It’s a little different but still useful
in the comparison we want to do. So the chart shows that current PE ratio in
the dark-blue bar along with the five-year average in light blue and the 10-year average
PE ratio in green. What you immediately see is that stocks are
getting more expensive in almost every sector with that current PE ratio well above the
ten-year average. Taking a closer look at the numbers and you
see just how expensive some of the sectors have become. The overall market, the S&P 500, is trading
at 17-times the earnings expected over the next year. That’s almost 15% more expensive than that
14.8-times average over the last decade. Even more expensive, you’ve got sectors
like Information Technology trading more than 30% over its ten-year average. I’ve added the percent premium or discount
above each sector so you can see just how expensive some of these sectors are. In fact, the only sectors that don’t look
dangerously expensive are energy, which is still reeling from the 2014 selloff in oil
prices, Industrials, Healthcare and Financials. Now understand…when I say dangerously expensive,
it’s from the perspective of a die-hard value investor. I hate buying stocks when they’re even a
little bit expensive so, yeah a little biased on this one. The truth is that stocks aren’t ridiculously
expensive compared to other bull markets. Not to the point we saw in the dot com bubble
or in the 70s and 80s. Even if stocks were trading at higher prices,
this isn’t one that usually causes a crash in itself because investors are perennially
positive. It’s the nosebleed valuations that just
make it more likely that another catalyst, for example the Fed raising interest rates
like it did late-1999, will start a crash. Speaking of the Federal Reserve, that’s
another common cause of falling stock prices though I hate to put the blame on the Fed. Look, the people on the Federal Reserve Board
are public services, very highly educated and experienced ones, trying to help the economy
avoid the worst outcomes. Their mission is two-fold, full employment
and stable prices but these are sometimes competing missions. Full employment is great but if it comes at
the expense of consumer prices surging as much as 13% a year, as they did in 1980, then
the Fed has to raise rates to fight inflation. Even worse, sometimes we get inflation without
economic growth and the Fed has to walk an even finer line. It might be politically-easier if the Fed
kept throwing money into the system but it’s just not responsible and would leave the central
bank with no ammunition to lower rates when a recession does come. Anyway, the Fed has been blamed for a few
recessions and bear markets, especially in the 80s when Chair Volcker took short-term
rates to 20% to fight inflation. Right now, it doesn’t seem to be the case. While Chair Powell isn’t giving President
Trump the zero-percent rates he wants, the Fed is cutting rates to keep the economy growing. Finally before we look at the average stock
market returns over the last decade and what to expect going forward, understand that external
shocks can also cause stocks to fall fast. Nearly half the bear markets since the 30s
haven’t coincided with a recession. Against those main causes we’ve looked at,
these are usually unexpected and external shocks. Some examples include Hitler’s invasion
of Poland in ’39 that brought a 32% drop, the attack on Pearl Harbor in 1940 that saw
a 35% plunge. The 1961 flash crash took stocks down 28%
and has never really been rationalized and then the currency crisis in 1998 that saw
markets drop 20% before heading higher in the dot com bubble. Now I want to look at the average stock market
returns over the last decade and maybe why you should look further out for what to expect. The S&P 500 has risen 11% on an annualized
basis since 2009, more than 10 years but is that realistic? If stock prices are a function of that earnings
growth…and corporate earnings grew at less than 5% year-over-year last quarter, how long
can stock prices surge higher? In fact, the average annual return since 1957
is 8% and we’re going to look at some analysis next that shows returns could be even lower
than that over the next decade. First though, I want to get your feedback. Do you think a stock market crash is coming? Of the reasons we looked at, or others you’ve
seen, which are the biggest warning signs of a potential bear market? Scroll down and tell us in the comments. Before we look at that research on stock returns
going forward, it all begs the question, “What is a good return on investment?” The question itself is dangerous at best. Is 4% good…why not 8% or 15%? Reaching for an arbitrary return just means
investors keep reaching into more risk…and eventually are reminded what happens with
that risk. A good return then is getting the return you
need to meet your goals. That means knowing what your goals are in
the first place and then a reasonable return to get there. It’s something I’ll talk a lot about in
a free webinar I’m planning on goals-based investing. It’s a strategy I developed working with
private wealth managers and aligns your investing back to your own personal goals. I’ll put a link to the free webinar in the
video description so make sure you check that out and reserve your spot. Now I had planned on looking back to show
you the average returns by asset but instead, I want to look forward. That’s what’s really important, right? Those returns you can expect in the future,
rather than what we’ve seen in the past. So let’s look at some research by fund provider
Blackrock, estimating the 10-year expected returns and what it means for your investments. What we see is a chart of 21 sub-assets; that’s
12 types of debt investments, five equity investments, real estate and some alternative
assets. The chart shows the forecast returns with
circles and the uncertainty around each. For example, there’s huge uncertainty around
private equity returns, that far-right bar. The average expected return is 13.2% over
the next decade but in actuality, it could be near zero to over 25% annually. That’s a combination of the uncertainty
in the research plus that normal volatility in an alternative investment like private
equity. Now we’ll look at some of these but understand
these estimates are nominal returns, that’s without adjusting for inflation. These are the headline returns Blackrock expects
though inflation will likely eat away at around 2% of the value in each of these. I’ve highlighted six investments here in
three assets; stocks, bonds and real estate with the exact estimate for ten-year forward
returns. US government bonds, that 10-year Treasury,
are expected to yield a 1.7% return over the decade and US bonds are actually the bright
spot. Globally more than $15 trillion in government
debt trades for negative interest rates, German 10-year bonds yield a negative 0.6%, people
are actually paying to hold their money in the bonds. That means investors from all over the world
are pouring into US Treasury debt for that positive return and pushing down long-term
US rates. Bond returns have been great this year on
a huge slide in rates but that expensive valuation means returns going forward will probably
be weak at best. There’s no end in sight to rock-bottom global
rates and this is going to be a real problem for retirees, pension funds and insurance
companies that need a safe and stable yield. US credit, so investment-grade companies,
are expected to yield a little more at 2.3% over the decade. That in itself is pretty amazing that corporations
will be able to borrow at rates so low. We’re already in a corporate bond bubble
with debt piling up on balance sheets and this is one of the most likely causes of a
coming crash. High-yield corporate bonds are expected to
yield 4.7% but before you rush to put all your money in non-investment grade debt, remember
these are also called junk bonds for a reason. These companies will get slammed when a recession
does hit and the return could be much lower than that average estimate. Next here, these US equities, so we’re talking
the S&P 500 here, is expected to produce around a 6% return over the decade. That’s a pretty far cry from the 11% return
over the last decade and I know a lot of you are skeptical. Just understand, there will be a recession,
likely more than one, in the next decade and probably within the next few years. It’s all but guaranteed. Look back at that bull versus bear market
history from earlier and you see that a crash can wipe out a third of the market in a heartbeat. So even if you don’t agree with that 6%
return estimate, I think 8% would be the best anyone could hope for. Remember, we’re already at a high price-to-earnings
valuation. Interest rates are already extremely low and
not really helping to drive economic growth. There just aren’t a lot of positive signals
for stocks. Small cap stocks, so those smaller companies
that are more risky but supposed to produce higher returns, are expected to do just that
with a 6.3% annual return. That’s not much extra but it adds up and
I think every investor should have some exposure to these small caps as well as the larger
companies. Finally, look at the expectation on real estate
because I think this is really interesting. Blackrock expects US commercial property to
underperform stocks, producing a 5.3% annualized return. I think a lot of that is on the assumption
that rates will generally be going up over the period because they’re so low right
now and rising rates are mostly bad for property investors. The uncertainty on the real estate forecast
is interesting as well though, much wider than that of large-cap stocks. So while property is expected to underperform
the S&P 500 by about 0.7% a year, it could do much better or much worse. Two things I think you should take from this
chart. One is that returns are likely lower over
the next ten years compared to the previous. If you’re planning your nest egg on 11%
returns…you’re going to be disappointed and not saving enough. Plan on a blended portfolio of stocks, bonds
and real estate producing maybe around 5% if you’re lucky and save accordingly. Also, notice there’s a lot of uncertainty
around each of those estimates. Stocks of large companies are expected to
produce a 6% annualized return but it could be in the low single digits or as high as
just over 10% over the next decade. That means you really need to be mixing these
different assets, putting a portfolio together of stocks, bonds and real estate. It’s not about just going all-in on stocks
and hoping for that 10% annual return. It’s about spreading your risks around to
make sure you get the safety of bonds and the upside potential of other assets. Click on the video to the right to see my
five favorite monthly dividend stocks that will never let you down! No matter where the economy goes, these stocks
will continue to pay out those cash dividends. Don’t forget to join the Let’s Talk Money
community by tapping that subscribe button and clicking the bell notification.

22 Comments

  • Passive Income Tom

    October 14, 2019

    The thoughts of a recession has been mentioned for quite some time. I wonder what will actually cause the market to crash. 🤔

    Reply
  • Let's Talk Money! with Joseph Hogue, CFA

    October 14, 2019

    Worried about a crash? 😩 Check out these Five Dividend Stocks that will NEVER let you down! https://youtu.be/huy7Ui5xg_s

    Reply
  • Jacobl Hammonds

    October 14, 2019

    Hi Joseph thanks for sharing such valuable information freely here on YT. I really enjoy your content. Recently I've been trying to find one of your old videos on how to properly value a REIT. I own a REIT ticker symbol $IIPR. I want to try and value the company to ensure that I am weighing the risks and rewards properly. Please link me to that video where you explained how to value these REITs. Thank you so much!!!

    Reply
  • Fredrik

    October 14, 2019

    There are a lot of uncertainties right now. I'm moving more of my money to real estate crowdfunding instead of stocks. With real estate crowdfunding its much easier to manage risk and the returns are higher than the expected return on the stock market.

    Reply
  • Greg Kamei

    October 14, 2019

    Thanks for an informative macro view of stock market returns. With anticipated returns expected to be lower in the future, valuations becomes critical. As you mentioned, the growing amount of corporate debt is getting scary. Have to keep an eye on that as well.

    Reply
  • GenExDividendInvestor

    October 14, 2019

    Consistently Invest in quality dividend yielding companies over the long term and you should do great.

    Reply
  • EduMation

    October 14, 2019

    Lot of people ignore the taxes while calculating the actual returns. Great video

    Reply
  • The Dream Green Show

    October 14, 2019

    Wow! I'm heavy invested in the S&P 500

    Reply
  • chad

    October 14, 2019

    You sound like the mainstream media.

    Reply
  • LiveYourLife

    October 14, 2019

    When looking at historical annualized returns the last decade for a rough guide to what to expect for the next decade, I believe it would be more correct to compare to the top (or close to the top) before the financial crisis than the bottom. In that scenario the annualized return is around 6%. Maybe that's where they got the estimate for the next decade?

    Another thing that is misleading with the bull vs bear is that all bull-markets start from the bottom, while bear-markets start from the top. This is of course how it has to be, but it does give a somewhat misleading representation: if the market doubles, then halves, then doubles, then halves this will be shown as +100/-50%/+100%/-50% which seems good, but in reality (in that scenario) we've gone nowhere… I believe a better representation would be for the bull to show from top to top, and also annualize the returns (likewise for bear). [another problem with the normal representation is that it shows how things are if you are able to time the market]

    Reply
  • George Emil

    October 14, 2019

    Could it be that the 20% decline in 2018 from Oct to Dec was the bear market we've all been waiting for? The problem was that it wasn't followed by a recession.

    Reply
  • dustin hatch

    October 14, 2019

    When Trump leaves the White House, the economy will crash along with your investments/real estate values.

    Reply
  • Lew Paul

    October 14, 2019

    Good question. I think trump is going to do everything in his power to avoid recession. I don’t think any president wants a recession in his/her term, specially during first term if they want to get re-elected. In the whole history of stock market, was there a recession that happened during first term of newly elected president?

    Reply
  • Tim Crowe

    October 14, 2019

    Why isn't there a Money Academy sign in the background?

    Reply
  • Holy Warrior

    October 15, 2019

    I am not worried about a crash. IMO: Only quality investments will get you through the next crash, and the next crash could be a killer. Too much debts on the books (government and companies). Who will pay all these debts back?? How about retirement, health care if soc sec fails??? It looks almost like that money will be "worthless" soon. This could be one of the reasons why we see these high P/E ratings for high quality stocks, such as Nestle, P&G etc. My investment strategy: 30% Real Estate, 30% Gold and Silver coins, 20% Quality Stocks and Bonds, 20% currencies USD and CHF.

    Reply
  • stuckinsj

    October 15, 2019

    This feels like itll be a nugget to watch every so often. Saved to my Investing watchlist.

    Reply
  • Unemployable

    October 15, 2019

    I see the next crash stemming from increases in tax rates. Calling it October 2020. I subscribe to Dr. Burry's etf theory.

    Reply
  • Wolf of Dubai Stocks Investing Channel

    October 15, 2019

    It’s about 8% on average in S&P500…

    And we had financial crisis, world wars etc.

    Reply
  • Squintillions

    October 15, 2019

    I’m wondering how much the lowering of the barrier to entry to invest in the market with all of the new investing apps is effecting what is going on in the market.

    Reply
  • Ty Love

    October 15, 2019

    Hey Joseph, got any book recommendations for someone new to the stock market

    Reply
  • Else Müller

    October 16, 2019

    Data of the last 120 ! years showed 6% average anual return for the US Market. Seems to be a good timespan to avoid data mining. Source is: Gerd Kommer, a german analyst. Even only 5% globally ( he still recommends global investment for diversification).
    And: this is all BEFORE Taxes & Inflation, so the real return was even lower.
    Forget about main stream 8-10% , even though it would be needed badly for retirement insurance😣

    Reply
  • Gradual Financial Freedom

    October 16, 2019

    Hey Joseph, love the videos you and a few others have helped me on my way to financial awareness and hopefully freedom. One question for you, I know you did a video a while back talking about bond investing but would you be able to do a video that shows a proper diversified portfolio for bull and bear market strategies?

    Reply

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