The average stock market rate of return is a tool that investors can use to gauge the historical performance of the stock market. Since 1928, the average rate of return on the Standard & Poor's 500 Index — commonly known as the S&P 500 and used as a barometer for the market as a whole — has been 9.8 percent. However, there are many different ways to measure stock market return.
Two Additional Measures of Stock Market Return
Two other market indices used to measure stock market return are the Dow Jones Industrial Average and the Nasdaq Composite. The Dow consists of 30 companies that are envisioned as having the biggest effect on the U.S. economy.
The long-term average return for the Dow is 10.18 percent.
The Nasdaq Composite includes more than 2,500 companies traded on the Nasdaq exchange, which has historically hosted more speculative companies but is also home to some of the most well-known companies in the world, such as Apple.
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The Nasdaq was only founded in 1971, but its annual return from February 5, 1971 through February 18, 2018 has been 9.53 percent. Over that abbreviated time period, the S&P returned an average of 7.35 percent, while the Dow's return was 7.36 percent.
Effect of Dividends
When sources quote the long-term average stock market return, they typically provide total return figures. Total return includes the effect of dividends, which are cash payments companies make directly to investors, typically quarterly. If you reinvest those dividends by using them to purchase more shares of stock, your long-term return will increase. For example, from February of 1897 to February of 2018, the long-term total return for the Dow Jones was 10.18 percent, but without the effect of reinvested dividends, that return drops to just 5.46 percent.
How to Use the Average Stock Market Return
An important thing to realize is that the "average" stock market return is not the "expected" return, which is unknowable. In any given year, it is unlikely the stock market will return an "average" return. For example, according to LPL Financial, only six years finished with a gain between 5 and 10 percent. However, the long-term average return can be used for comparison purposes with other potential investments, such as bonds or certificates of deposit, or even with different market indices, such as the Dow vs. the S&P 500.