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?
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.