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Remember learning about means, medians, and modes in middle school? You're about to understand why they taught that shit to you.

What’s the REAL Rate of Return on the Stock Market?

Our awesome Patreon donors have asked us to tackle a really interesting question this week: what’s the real rate of return on the stock market?

If you ask people this question, you get surprisingly different answers. And for some reason (boredom at my day job) I decided to get all art school with it. Here, I wrote you a one-act play on the topic!

WHAT THE FUCK IS IT EVEN: THE REAL RATE OF RETURN ON THE STOCK MARKET

A Play in One Act

SOME PEOPLE
(With great confidence)
Ten percent!

OTHER PEOPLE
(With low confidence)
Ssssssssssix?

MOST PEOPLE
(In anguish)
Why are you asking me this?! Shit. Am I supposed to know?!

SOME PEOPLE
(Smugly)
It’s totally ten percent. Why would you ever buy a house or pay off debts when stocks are so mathematically superior?

OTHER PEOPLE
Ssssssseven??

MOST PEOPLE
(With self-loathing)
I feel like I’m too busy to know this. But also I made time to watch that Zac Efron Ted Bundy biopic on Netflix, so…

SOME PEOPLE
Don’t even buy a single tube of mascara or a ham sandwich. It’s a waste. It’s unoptimized garbage. I buy nothing but stocks and Soylent!

OTHER PEOPLE
Wait, is this the four percent thing? I’ve heard people talk about the four percent thing. Is it foooourrrr?

DAVE RAMSEY bursts onto the stage.

DAVE RAMSEY
It’s 12% if you follow my system! But I never agreed to be here! My company sends cease and desist letters to people who criticize me!

DAVE RAMSEY exits the stage and the playwright forgets to go back and delete that part.

MOST PEOPLE
(With resignation)
No, you know what? I know that Alleras the Sphinx is actually a lost Sand Snake, and I know three quarters of the verses of Mambo #5, but I do not know what the rate of return on the stock market is and I have accepted that fact about myself.

SOME PEOPLE rubs stocks all over his torso. He visibly nips out. OTHER PEOPLE keeps mumbling random numbers. MOST PEOPLE starts adjusting the Pinterest board for her wedding, even though she is not engaged or seeing anyone seriously.

Rocks fall; everyone dies.

Why some people say 10%

Let’s break this down.

Let’s say you put $100 into the stock market in January. By December, how much money will you get back?

The real answer is that no one ever knows what the return on investment will be for the stock market. There is no definitive answer. Please don’t trust the financial advice of anyone who tells you otherwise.

What is known is what the return on investment has been in the past. And we extrapolate that data to estimate future returns.

People who have great confidence in the free market system average that historical performance data and treat it like a general truism about investing. These people consider markets to be a changing but predictable force. Like the sun, the market goes up, and the market comes down, so it averages out to twilight all the time! (When the forecast says as much, it’s alarming when you open the door expecting peaceful dusk light and see a blazing midday sun—or total darkness. Which is why it’s good to understand the difference.)

For these people, a common answer is a 10% return on investment. Meaning if you put $100 into the market in January, you’ll probably have $110 back by December.

Why other people say 7%

For the sake of realism, many people adjust that 10% down to 7%. This is because we have a steady inflation rate of about 3%.

Meaning you might put $100 into the market, get $110 back, but the $110 only buys you $107 worth of goods now. This is because our market is designed to inflate the cost of goods and services just a liiiiiittle bit year over year.

If this is confusing, check out our article on this subject, which is very hand-holdy:

… or 6%

Others describe it as 6% because it’s a more conservative number that captures the incredible 2008 downturn.

Using the lower number of 6% is a good idea for financial planning because it’s realistic tending toward pessimistic. “Hope for the best, plan for the worst” is fantastic advice in most areas of life. And it’s especially true of money.

Wait, but Dave Ramsey said 12%!

<rubs temples> Right, let’s get into that.

Remember learning about means, medians, and modes in middle school? Buckle the fuck up, because you’re about to understand why they taught that shit to you.

Data is like a Literal Genie. If you rub its lamp, it will answer any question you set before it—but the answers can still be deceiving or even damaging if you don’t word them carefully.

Let’s say you have ten people sitting in a room. I tell you that the average age of the people in that room is 14.5 years old. How old do you expect the people in that room to be when you walk inside and see them?

You’d probably expect to see a bunch of high school freshmen and sophomores. And that’s true: the average age of five 14 year olds and five fifteen year olds is 14.5.

But it could also be nine kindergartners and their ancient great grandmother. Because the average of 5, 5, 5, 5, 5, 5, 5, 5, 5, and 100 is also 14.5%.

And it could also be five 29 year old women nursing their five infants. Also, what are you doing barging into the lactation lounge? That mini-fridge isn’t for your Snapple. GTFO.

It’s a helluva simplification, but that’s basically what Ramsey’s doing with his 12% claim. He’s using data and arithmetic in a weird way to get a number that sounds incredibly high, and even his stans hesitate to repeat it. It’s not really untrue, but it is bullshit. If you want to get into it more deeply, Rob Berger did a nice job of explaining it in a podcast you can listen to here.

Meh, what’s a percentage point or two between friends?

The difference between 6% and 7%—or even 6% and 12%—probably sounds trifling. (I hate to use the word “trifling” in its adjective form when its verb form is so much better, but these are the times that try men’s souls.)

But the magic of compound interest is such that a single percentage point represents an enormous difference to someone investing over a long period of time.

Ann Carrns did a great job of breaking down this math in the New York Times…

Say you start with $100,000 in your investment account. After 30 years, at 12 percent annually (per Dave Ramsey’s advice), you’d have $2,995,992.

At 9.89 percent annually—the S&P 500’s true return from 1926 through 2010—you’d have $1,693,344.

At 6.7 percent annually—the true S&P 500 rate, after adjusting for inflation—you’d have $699,733. That’s roughly a fourth of what Mr. Ramsey leads his devotees to expect.

Dave Ramsay’s 12% Solution

Investing a hundred thou and multiplying it by seven is pretty incredible on its own. I’d be happy with that. But if you anticipated three million, you’re gonna have a bad time.

The point is: the stock market is unpredictable by its nature. If anyone tells you they know a guaranteed way to consistently make atypically amazing returns, that person is probably trying to sell you something. Don’t trust them.

The stock market is a messy bitch who loves drama

The point I want you to take away is that averages aren’t necessarily a good preparation for reality.

In addition to skewing expectations, they also flatten out the drama of the market. The chart below will give you a better idea of the market’s Starks and Lannisters history of precipitous climbs, dizzying falls, and boring undulations.


If you put $100 in the market in January of any given year, what would it be in December?

  • 1991? The answer is $130!
  • 2008? The answer is $63!
  • 2015? The answer is $100!

So fuck everything, I guess! ¯\_(ツ)_/¯ 

If you invest over many years, the number becomes less likely to be a crazy outlier. Based on the historical data we have, diversified long-term investors eventually see pretty alright returns. Still, you should never think of the stock market as a good source of short-term gains or a completely bulletproof investment vehicle. A lot of people planned to retire in 2008. They had no idea the brutal yeeting their life savings were about to take. This is why Piggy is up your ass about diversifying:

All the data we don’t have

Remember that capitalism is only a few centuries old. Stock markets are even younger. The companies that comprise them are younger still—and getting younger all the time.

Much stock market performance data is calculated around the 500 largest publicly traded companies operating at any given time. In 1958, the average S&P 500 company was 61 years old. Today, it is only 18. And I know I literally just finished describing how tricky averages can be—but that’s a pretty crazy shift!

So what does that mean? In my opinion (which is unprofessional and half-informed on any subject area other than old anime), the markets are venturing into unpredictable new territory. Technology is driving change at an absolutely unprecedented breakneck pace.

In my mind, it’s inevitable that the markets will start to react outside of our comfortable past predictions.

Thank you

A huge thank-you to our Patreon donors for suggesting this topic. And just for being donors. Seriously, these people rock.

A lot of people told us that our recent article on the logistics of leaving home before 18 was what finally moved them to become donors. Y’all have no idea how misty-eyed this made me. I truly thank you from the bottom of my heart. As someone who was in a situation where I felt powerless, I feel it’s my calling to spread power to those without it.

Someday, if we have enough donors, I will make it my full-time job to spill rich tea. In the meantime it pays to keep the site free and build a small rainy day legal defense fund for when Dave hears we’ve been talking shit on him.

Until then, we’ll try to keep things balanced with topics like today’s (which are germane to someone with the safety and stability to invest) as well as topics like that one (which are life preservers for tiny babies).

If you want to influence the kind of topics we write on, please consider becoming a donor. You can vote on article topics for as little as a dollar a month. That’s $0.25 per article! Hot damn we’re cheap! Dollar Menu motherfuckers right here! Spread some special sauce on these bitches at Patreon.com.

For more investing advice, check out our Deathmatch series!

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5 thoughts to “What’s the REAL Rate of Return on the Stock Market?”

  1. Re: Alleras the Sphinx – I just started reading “A Feast For Crows” yesterday – spooky! But who is the alchemist? By the way, I just upped my Patreon donation because I want to ask a question too – where/how do I do it?

    1. Thank you so much, Cara! We always appreciate patrons… and those who grok our obscure ASOIAF references.
      You can ask the question using the message function on Patreon. Let us know if you have any trouble with that, and thanks again!

  2. Yup, this post clinched it. New Patreon member. Thank you for injecting levity, nerdness, and reality into the mythology of investing. You are my heroes. Fan art can’t be far behind.

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