Before you invest in the stock market, you may want some idea of the average annual return you can expect. By turning to any one of the online historical summaries of the market, such as the Dow Jones Industrial average yearly returns, and performing some simple math, you can quickly determine the average annual return from 1975 to the present. Your average return will most likely be lower than this.
The Dow Jones Industrial Average
One frequently used guide, the Dow Jones Industrial Average (DJIA), consists of a basket of 30 large U.S. industrial stocks that are selected both for their prominence in their respective fields and for the breadth of activities they represent. The components of the DJIA change from time to time as market activities and the fortunes of individual companies change, but through the more than 100-year history of the DJIA (sometimes called, simply "the Dow"), it has provided investors a reliable overview of the fortunes of major U.S. corporations.
The Dow's Average Annual Appreciation, 1975-2010
Adding up the annual returns from 1975 through 2010, as shown in the Dow Jones Industrial average yearly returns chart, and dividing the result by 36, the number of years covered, you will learn that the Dow appreciated by an average of 9.28 percent annually. Because the Dow concentrates on only a few of the largest U.S. corporations, you need to compare this result with a broader index, such as the S&P 500 Index, a selected group of 500 corporations covering nearly every field of significant business activity in the U.S. Unlike the Dow, the S&P (as it is usually abbreviated) includes smaller and less established businesses in the mix and may provide a more representative glimpse of the market than the Dow.
The S&P's Annual Appreciation, 1975-2010
Adding up the annual returns from 1975 through 2010, as shown in the S&P 500 Index yearly returns, and dividing the result by 36, the number of years covered, you will learn that the S&P appreciated by an average of 9.19 percent annually.
The Average Appreciation You Can Expect
Although both the Dow and the S&P had annual appreciations averaging a little over 9 percent from 1975 to 2010, a typical investor would almost certainly have a lower return. An investment centered around index funds and exchange traded funds could theoretically come close to these returns, because their management fees average about .2 percent of assets. Actively managed mutual fund management fees average about 1.6 percent, an overhead that will reduce your gains significantly. If you bought individual stocks in relatively small quantities -- let's assume 100 shares of a $20 stock -- your round-trip costs (when you bought in and when you sold out) would average around $20 at a discount broker and as much as $200 at a full-service broker. These brokerage fees represent overheads of 1 percent and 10 percent, respectively.
I am a retired Registered Investment Advisor with 12 years experience as head of an investment management firm. I also have a Ph.D. in English and have written more than 4,000 articles for regional and national publications.