Do people really still think stocks will return 10%?

There sure are a lot of headwinds for the stock market over the next decade.

The idea that putting your money in the stock market will deliver 10% returns is a staple of popular personal finance. Here’s an example I recently came across:

@dollarswithdrewHow to Become a Millionaire by Driving @DoorDash. The math doesnt lie! #doordash #sidehustle #gigworker #investing #millionaire #moneytok #genzfinance #personalfinance #financialindependence #financialliteracy

Tiktok failed to load.

Enable 3rd party cookies or use another browser

10%, when you compound it, is a very high return! With 10% returns you double your money every seven years! No wonder personal finance people use that number to urge you to save more money.

What’s kind of amazing, though, is that 10% has not actually been that unrealistic for what you could expect to earn in the U.S. stock market over the last century and a half! The compound annualized growth rate (CAGR) of the S&P 500 between January 1871 and December 2021, including dividends, was 9.37%. That’s in dollar terms, of course; when you account for inflation, it was just 7.14%. But doubling your wealth every decade, just by buying and holding some stocks, sounds like a pretty great deal to me.

And what’s even more amazing is how consistently this growth rate has held up over decades upon decades. Since 1926, 30-year annualized returns have hovered pretty closely around 10% or a little higher (or about 7% after inflation). Sure, there was risk in there. But the worst 30-year return you could get would be if you bought the S&P at the peak in 1929, and you’d still get about 8%!

In other words, the personal finance people are right…at least, as far as the past is concerned.

But past performance is no guarantee of future results, and there’s no deep reason to think that U.S. stock market returns are some kind of constant of the Universe. Also, a lot of people are just 10 or 20 years away from retirement, or from having to sell stock to pay for their kids’ college educations, so not everyone can take comfort in the idea of a 30- or 40-year investing horizon.

And when I look at the prospects for U.S. stock returns, I see a lot of headwinds. Market size is shrinking, growth is slowing, and companies may be less able to boost profit margins going forward. Interest rates are going up too, and there’s little reason to expect new retail investing manias like the one in 2021 to ride to the rescue.

That doesn’t mean there’s any clearly better investment than U.S. stocks out there in the world. And as always, note that this blog post should not be regarded as investment advice. I’m just not so ready to pencil in 10% when calculating my future wealth, like the people in the personal finance videos do.

Five things that affect stock prices