When it comes to achieving financial freedom, few long-term investments will return as much as stocks. Some individual companies will see their stock double many times over. Others will stagnate or see their share price drop over the long run. When people talk about stock market returns, they tend to talk about the broad market as a whole, not the returns of any single stock.
It’s frequently said that the stock market returns an average of 10% annually. This is actually a fairly accurate statement. Over the long term, the stock market has returned an average of 10%. However, this includes inflation. When excluding inflation, the real gains on the broader market are closer to 6% or 7%. While this might not seem as impressive, it is much higher than the returns that savings accounts or CDs will provide. Additionally, stocks generally provide better returns than bonds for long-term investors.
The Average Return
Most people bank on the 10% returns that are touted by industry spokespeople. However, the truth is a bit more complicated. The stock market does not return a flat 10% every year. Rather, there is quite a bit of volatility involved. Some years will see a negative return. Others will see a return that’s well above the average. The stock market will offer positive returns during most years. However, there are a few years that will actually see a return that’s right on the average. Those who are looking to build wealth and achieve the long-term average will need to stay invested through all market conditions.
Buy And Hold
Those who want to build wealth in the stock market will need to enter the market with a plan to stick with their investment strategy through thick and thin. It can be tempting to get too optimistic when the market is up. However, it’s important to avoid what former Fed Chair Alan Greenspan called “irrational exuberance.” Also, the market will go down at times, and it’s important to remain optimistic when this happens. A down market effectively provides a sale on stocks. Those who are able to keep their emotions in check and invest in whatever the market happens to be doing at a given time are likely to succeed over the long haul.