Here's Where The 7% Average Stock Market Return Comes From

Here's Where the 7% Average Stock Market Return Comes From

Common investing knowledge is that you can expect a 6-7 per cent return when you invest in the broad stock market. But where does this number come from? And is it accurate?

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Probably unsurprisingly, that figure comes from the most successful investor, Warren Buffett, who explained his reasoning to Bloomberg:

The economy, as measured by gross domestic product, can be expected to grow at an annual rate of about 3 per cent over the long term, and inflation of 2 per cent would push nominal GDP growth to 5 per cent, Buffett said. Stocks will probably rise at about that rate and dividend payments will boost total returns to 6 per cent to 7 per cent, he said.

As The Simple Dollar's Trent Hamm points out, you can see for yourself that this is a historically accurate figure over the long-term too.

The numbers are there, but Hamm brings up an important point: nothing is guaranteed, and as the saying goes, "past performance is not an indication of future results". Still, this is the best estimate for long-term returns, and its proven to be pretty accurate so far. Read more at the links below.

Stock Investors Should Expect 6%-7% Annual Return, Buffett Says [Bloomberg via The Simple Dollar]


    “past performance is not an indication of future results”

    If you honestly believe that, identify your three most productive members of the team and fire them. Find your most useless and give them a promotion. Because past performance is no indication of future results.

    It would be fair to say "past performance is no guarantee of future results" , but "no indication" is nothing but arse-covering fine print.

    The "return" includes money from selling the shares?
    Say you have $1 million, and buy shares. To get $70,000 [before tax] per year, you should expect $20,000 from dividends PLUS $47,619 from sale of shares [which economy & inflation have taken up to $50,000].
    In the second year, you need to sell $45,351 from original shares [2 years of interest] Third year: $43,192.

    Don't forget: the inflation is also eating away at the buying power of that $70,000.

    There is also a risk premium in there for equities. You expect bond yields to roughly return nominal GDP on average but equities need to return more to justify the additional risk.

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