Understanding the S&P 500 and Its Average Return
A simple guide to one of the most important concepts in investing.
When people talk about "the market," they're often referring to the S&P 500. It's a stock market index that represents the performance of 500 of the largest publicly traded companies in the United States. Because it's so broad, it's considered a reliable benchmark for the overall health of the U.S. stock market.
What is the Historical Average Return?
Historically, the average annual return for the S&P 500 has been around 10-11%. This is a long-term average, and it's important to remember that this doesn't mean the market goes up by 10% every single year. Some years are much higher, while others are negative.
Average Return vs. Real Return (The Impact of Inflation)
A 10% return sounds great, but you also have to consider inflation. Inflation is the rate at which the cost of goods and services increases, which reduces the purchasing power of your money.
What is Real Return?
The real return is your investment return after subtracting inflation. This is the actual increase in your purchasing power.
Formula: Real Return ≈ Nominal Return - Inflation Rate
| Scenario | Market Return (Nominal) | Inflation Rate | Your Real Return (Approx.) |
|---|---|---|---|
| Good Year | +10% | - 3% | +7% |
| Exceptional Year | +25% | - 4% | +21% |
| Tough Year | +5% | - 8% | -3% |
As you can see, even in a year where the market is up, high inflation can mean your money actually buys less.
How to Use This Information for Planning
The historical average return is a powerful concept when used for long-term goals, like retirement planning. By using this average, you can project how your investments might grow over 10, 20, or 30 years.
See Your Potential Growth
Use our Compound Interest Calculator to project your wealth. Input your investment, monthly contributions, and an estimated return (like 7-8% to be conservative) to see the power of compounding.
Try the Compound Interest Calculator