The London FTSE has delivered around a 5.5% historical stock market return since 1984.
Meanwhile, emerging markets’ stock returns have underperformed the S&P 500 in the decade from 2010-2019 (3.68% vs. the S&P’s 13.56%), but trounced US stock markets from 2000-2009 (9.78% vs. -0.95%). Over the last 30 years, emerging markets have roughly equaled US stock market returns on average.
Price Growth & Dividends
Stocks, like real estate, earn returns in two ways: price growth and income yield. To understand the total return on a stock or index fund, you need to include both.
Stock price growth is easy enough to understand. If a stock rises in price from $10 to $11 over a year, it returned 10% on price growth alone.
Dividends aren’t “rocket surgery” either, as my ex-girlfriend used to say. If a stock pays a 2% dividend yield, you earn $0.20 over that year, in addition to the $1 rise in price. Of course, in the real world, the price and dividends are constantly changing, but you can look at how the stock has paid dividends compared to its current price.
The total stock market return of 10.49% for the S&P 500 assumes that you reinvested dividends. But you can, of course, live on dividend income as well, to help you reach financial independence and early retirement.
Nor are stocks the only investment that pay dividends. Most real estate crowdfunding investments also pay dividends, often at high yields. For example, the Income portfolio at Fundrise paid a nearly 5% dividend yield in 2021, and Streitwise paid an 8.4% dividend yield. Both enjoy a place in my personal nest egg.
Volatility: “Average” vs. “Normal”
From 1926, the S&P 500 only delivered returns in the “average” range of 8-12% seven times.
Seven times, out of nearly 100 years.
Instead, you see soaring returns like 2021’s 26.89%, or flops like 2018’s -6.24%. Or utter crashes like 2008’s -38.49%.
Word to the wise: automate your stock investments with a robo-advisor. Set it and forget it. Do not, under any circumstances, panic sell when the bottom drops out of the market. I personally use Charles Schwab’s free robo-advisor service, but SoFi Invest and Ally Invest offer two other free alternatives.