Roger Wohlner is a writer and financial advisor with over 20 years of financial services experience. He writes about financial planning for Wealthsimple and for a number of financial advisors. His work has been published in Investopedia, Yahoo! Finance, The Motley Fool, Money.com, US News among other publications. Roger owns his own finance blog called 'The Chicago Financial Planner'. He holds an MBA from Marquette University and a Bachelor’s degree with an emphasis on finance from the University of Wisconsin-Oshkosh.
The S&P 500 is a market cap weighted index of the 500 largest U.S. stocks. This means that companies with the largest market cap, defined as the total number of shares of the company’s stock outstanding x the market price for the stock. Companies like Apple or Microsoft that have very large market capitalizations will have an outsized influence on the performance of the index.
The Dow Jones Industrial Average is an index comprised of 30 large cap, major industrial corporations. Over time the definition of “industrial” has been expanded to include tech companies and other major influential companies. General Electric is the only original member of the index still included. Over time companies have come and gone. Today the Dow includes companies like Apple, Walmart, Microsoft, and Boeing.
The S&P 500 and the Dow are two of the most quoted and influential stock market benchmarks and are often used as a proxy for the market. Beyond this, there are other stock market benchmarks that represent not only large cap stocks, but also small caps, mid-caps, foreign stocks, and others. It can be helpful to use these types of benchmarks to compare the performance of a stock, ETF, or mutual fund that you might be considering investing in.
In looking at the past performance of stocks or any type of investment, it’s important to keep in mind that past performance does not provide an indication of what might happen in the future. In other words: Take average stock market returns with a big pinch of salt.
Average stock market return over time
The Dow Jones Industrial Average’s inception date was May 26, 1896. Through May 25, 2018, the index’s average annual return has been 5.42%. This has varied over time, of course. For the 25-year period ending January 6, 2012, the index had an average annual return of 7.55%. For the 91 years prior to 1987, the average annual return was about 4.3%.
The S&P 500 index began in 1926 and was know as the Composite Index. The index was originally composed of 90 stocks. In 1957 the index adopted its current format of including 500 stocks. Average annual returns for the index from 1957 through the end of 2018 were about 7.96%. The average annual return from its inception in 1926 through the end of 2018 was about 10%.
Stock market returns in recent years
The returns posted by the S&P 500 and the Dow Jones Industrial Average over the past two years illustrate how much returns can vary from year-to-year.
For the Dow Jones Industrial Average:
Total return 2017: 29.11%
Total return 2018: -3.48%
For the S&P 500 index:
Total return 2017: 21.83%
Total return 2018: -4.38%
So far in 2019, both stock market benchmarks have recovered nicely, with the Dow up 15.40% and the S&P 500 up 18.54% year-to-date through June 30.
While these are popular stock market benchmarks, they are made up of individual stocks. Using the S&P 500 as an example, the stock of NVIDIA was down over 31% for the 12 months ending June 30, 2019, while Starbucks’ stock was up over 95% over the same time period.
Morningstar defines large cap stocks as being those in the top 70% of the market capitalization of all U.S. equities. Looking beyond large cap indexes provides some insights into other sectors of the stock market.
For example, the Russell 2000 index which is a benchmark for small cap stocks had this performance over the past two years:
Total return 2017: 14.65%
Total return 2018: -11.01%
So far in 2019, the Russell 2000 is up 16.98% for the year-to-date through June 30, 2019.
Morningstar defines small cap stocks as those in the bottom 10% of total capitalization of the U.S. stock market as being small caps. These are generally smaller companies that may be reliant on a single product or service. They are generally considered to be more risky than large cap stocks, but of course this will vary widely from stock to stock.
The stock market is not limited to domestic U.S. stocks. There are a number of foreign stock benchmarks as well. One of the most widely followed is the MSCI EAFE index. EAFE stands for Europe, Africa and Far East. This is the benchmark of stocks largely from developed non-U.S. countries.
The MSCI EAFE index had this performance over the past two years:
Total return 2017: 25.03%
Total return 2018: -13.79%
So far in 2019, the MSCI EAFE index is up 14.09% for the year-to-date through June 30, 2019.
Stock market return historically
It can be instructive to look at stock market returns over longer periods of time as well.
Looking at the annualized average returns of these benchmark indexes for the ten years ending June 30, 2019 shows:
Dow Jones Industrial Average: 15.03%
Russell 2000: 13.45%
MSCI EAFE: 6.90%
Note that the returns for the S&P 500 and the Dow Jones Industrial Average are both well above historical averages. This period encompasses the current bull market for stocks that began at the bottom of the financial crisis market decline in March of 2009 on the heels of the financial crisis of 2008-09. (A bull market for stocks is one that is rising. It is generally marked by sustained increases in share prices and investor confidence that this trend will continue for the foreseeable future.)
Looking at the annualized average returns of these benchmark indexes for the 20 years ending June 30, 2019 shows:
S&P 500: 5.90%
Dow Jones Industrial Average: 7.03%
Russell 2000: 7.70%
MSCI EAFE: 4.00%
This is an interesting period as it includes the market peak in early 2000, the dot-com decline from early 2000 through most of 2002 that also encompassed the 9/11 attack of 2001.
This time period also includes the full impact of the financial crises that saw huge losses across the board among all areas of the stock market, including these four benchmarks in 2008.
S&P 500: -37.00%
Dow Jones Industrial Average: -31.93%
Russell 2000: -33.79%
MSCI EAFE: -43.38%
These returns represented the worst annual period since the time of the Great Depression in the 1930s.
This time period begins less than two years after the Black Monday crash of October 19, 1987 when the Dow Jones Industrial Average dropped 508 points which translated to 22.6% of its value. While we have seen much larger point drops due to gains in the values of the major indexes since then, this is still considered a major market event.
Dow Jones Industrial Average: 10.99%
Russell 2000: 9.29%
The long-term return of the stock market, as measured by the S&P 500 index from 1957-2018 is about 7.96%.
What does this mean for us as investors?
As we stated at the outset, past returns do not provide an indication of what the future holds. That said, we can see that over time those who have stayed invested in stocks have largely been rewarded.
Historical inflation since World War II has averaged a bit less than 3%. Over time investors in the stock market have been rewarded with inflation-beating rates of return.
That said, these are long-term averages. As we saw during periods like 2000-2002 and from the end of 2007 through early 2009 the stock market can stage vicious corrections resulting in significant short-term losses.
What this means for investors is not to stay out of the stock market, but rather that a financial plan and an investing strategy are needed. Your investments should reflect your time frame for needing the money, your risk tolerance, and other factors. For example, for funds needed in the next year or so it may make sense to keep these funds in a lower risk, liquid account like a money market fund or similar investment.
Younger investors generally have a longer time horizon and can take more risks. Older investors, especially those in or near retirement, have less time to recover from a major stock market correction and should position their portfolios accordingly.
Many investing experts tout index products (mutual funds and ETFs) as a smart way to invest. This idea has a lot of merit. Over the past 30 years it has become much more difficult for active fund managers, those who make active decisions as to which stocks to hold or not hold in the fund’s portfolio, to beat the performance of index funds that passively track indexes like the S&P 500 and a number of others.
The key is to look at the appropriate asset classes for your portfolio and to find low cost vehicles like index mutual funds and ETFs for most of your stock allocation. In looking at index funds, find a fund that invests in an index that you can understand and that makes sense as part of your portfolio.
Investing with a Robo-Advisor
Investing in stocks via ETFs or mutual funds is an important part of a diversified portfolio. Many people choose to invest with a robo-advisor because it allows for further diversification. If one investment goes sour it does not drag down your entire investment portfolio. A robo-advisor can help you determine what your overall asset allocation should be based upon your situation. You just take a short survey to determine your goals and risk tolerance before a personalized portfolio is built for you.