Historic S&P 500 Returns and Stock Investment Expectations

By Stock Research Pro • January 8th, 2009

Stocks are just one of many ways you could invest your hard-earned money. When you purchase a share of stock, you take a share of ownership in that company. The company is collectively owned by all the shareholders with each share representing a claim on the company’s assets and its earnings. Investors often choose stocks over other investment options because stocks have historically provided the highest returns. Stocks offer investor their best opportunity to see a return that is better than the rate of inflation.

Stock Market Volatility

On the downside, stock investing can be extremely volatile. Stock returns can fluctuate enormously because they depend on events and conditions that are impossible to predict, including the state of the economy.

Historic S&P 500 Returns

For stock investors, the principal concern is in achieving a capital gain and/or income from the stock investment. For the 70 year period from 1928 – 1997, the S&P 500 (which is often used as a benchmark for stock market returns) delivered a compound average return of over 10 percent. This performance was well ahead of inflation, and the return of other investment options, including bonds and real estate.

In the three-year period from 1997 - 1990, the total returns on the S&P 500 averaged just about 26 percent. But, because this performance was not supported by a similar increase in profits by these companies, the “bubble burst”. In the three-year period from 2000 – 2002 the index was down over 15 percent.

For the years 2003 – 2007, the S&P 500 saw total returns of just over 13 percent before plummeting in 2008 to a 37 percent decrease.

Using the Capital Asset Pricing Model to Estimate Returns

So what should an investor reasonably expect to see for stock market returns? That depends largely on the level of risk they are willing to assume as increasing risk should increase expected return. The Capital Asset Pricing Model (CAPM) equation is often used to quantify this risk to calculate an expected return.

Some Guidelines in Using the Calculator:

- The risk-free interest rate is the rate the investor would expect to receive from a risk-free investment, such as U.S. Treasury Bills.

- Stock beta is used to demonstrate the relationship between the movements of an individual stock versus the market as a whole. To find the stock’s beta, got to Yahoo! Finance and enter the stock symbol in the Get Quotes window. ON the left-hand side, under Company, click on Key Statistics. The beta appears on the right-hand side under Stock Price History.

- The expected market return is the return the investor would expect from a broad stock market index, such as the S&P 500.


The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

delicious | digg | reddit | facebook | technorati | stumbleupon | chatintamil

Leave a Comment

You must be logged in to post a comment.

« Understand and Calculate the Price-to-Cash-Flow Ratio | Home | The Importance of the Company Balance Sheet to Investors »