What is the S&P 500 Average Annual Return?

Many investors build their portfolios around index funds. These bundled assets provide a return that tracks some third-party metric such as the price of gold, the bond market or, commonly, the U.S. stock market. The S&P 500 average annual return makes its index one of the most stable investors can ask for, and provides a strong analysis to see what the market, as a whole, looks like if you invest long-term. To determine how investments in the S&P 500 might work in your portfolio, consider working with a financial advisor.

What Is The S&P 500?

The S&P 500 is a stock market index that measures the value of the 500 largest companies traded on U.S. stock markets. It is generally considered to be the best benchmark of how the U.S. domestic market is performing. Even though most lay sources refer to the Dow Jones Industrial Average when they say something like “the market” reached a certain value when investors refer to “the market” they are usually talking about the S&P 500.

This market index has existed for more than 90 years, since 1928. At that time the S&P 500 average annual return was just under 10%. for almost any investor an S&P 500 index fund typically offers a highly competitive rate of return.

What Is an Average Annual Return?

s&p 500 average annual return An average annual rate of return is what you would receive, on average, if you invested your money in an asset on a year-to-year basis. The annual rate of return for an asset is how much it grew or shrunk over one year, taking into account all profits and losses. It is the difference, expressed as a percentage, between the asset’s value at the beginning of the year and at the end.

The average annual rate of return on an asset is the annual rate of return the asset has delivered over its lifetime averaged out. So, for example, say a stock has existed for three years. In the first year, it grew by 10%. By the second it shrank by 5%. Finally, in the third year, it grew by 20%. The average annual rate of return would be (10 + -5 + 20) / 3 = 8.3. This stock has an average annual rate of return of 8.3%.

As noted above, the S&P 500 average annual return is slightly below 10%. The S&P 500 tends to have highly variable values in any given year. In 2017, for example, the market posted an annual return of +19.42%. By 2018 it had a return of -6.24%. However, back in 2012 it grew by 13.41% while in 2013 it grew by 29.6%. Over the past 20 years alone this market index has fluctuated within a range of 60 points.

This has been consistent over the entire life of the index. The 10% S&P 500 average annual return is the sum total of all these highs and lows. It is a simple average. Nothing about it is weighted.

It is particularly important when reviewing the S&P 500’s performance to remember that each year is assessed relative to the last. This means that showing growth and losses as percentages can, at times, create an impression that the market is stronger or weaker than it actually is.

Analyzing the S&P 500 Average Annual Return

There have been few negative growth months over the past several years, even with a global pandemic. In fact, only in the first three months that COVID-19 impacted the U.S. did the market see a negative return. Then the market provided positive growth every month for 23 straight months before hitting its current downward trend.

The point here is that rates of return can be deceptive. By showing you the information in percent form, a rate of return can imply that an asset is stronger or weaker than it actually is. What matters is the objective value of your asset, in this case, an S&P 500 index fund, before you buy or sell it. The annual long-term return is the most important if you plan on investing in long-term assets in the market.

Why Does the Average Return Matter?

s&p 500 average annual return This matters for two reasons. First, this average rate of return lets you compare investing in an S&P 500 index fund against other potential investments. You can consider how alternatives stack up against this rate of return, particularly given its consistency. The S&P 500 has averaged approximately a little bit below 10% for years.

Second, it’s important to understand that this will reflect only your gains over the long term. On an annual basis, the S&P 500 tends to swing widely. It is in fact very rare for the index to ever come close to its S&P 500 average annual return; in most years it is significantly different.

The Bottom Line

It’s important to understand that in a given year when you choose to sell your fund, the index might be up by 30% or it might have declined by 20. What’s more, it depends on when during the year you sell. At the time of writing, the S&P 500 was down 10.66% last month and had a string of eight straight months of having a negative return. However, the long-term average still sits at more than 6.5%.

Tips for Investing

If you’re wondering whether or not the S&P 500’s returns would be a good blueprint for your portfolio, consider talking to a financial advisor. Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
The S&P 500 can’t tell you what your investment risk tolerance is. It won’t let you know how much tax and inflation can take out of your investment. If you have questions about any of the above, or how much your investment will grow over time, SmartAsset’s investing guide can offer some answers.