What is the average return on investing?

Before you start investing, it can be interesting to know the average return on investments. In this article we look at past returns based on historical figures and try to give an indication of the average return you can achieve with investments. Finally, we also explain how you can achieve more than the average return by investing wisely.

Average return summary

  • The average return on shares is about 7-8%.
  • The average yield on bonds is around 5%.
  • You have to take inflation into account: the real rate of return is different.
  • The volatility of the shares is also important.
  • The average return you achieve depends on your portfolio.

What do you want to know about returns?

What is the average return on shares?

According to Warren Buffett, a famous stock trader, the average return on shares should be between six and seven per cent. According to him, the domestic product rises by an average of 3% over the long term, with inflation of around 2% on top of that. This brings the nominal growth rate of the total economy to five per cent.

However, companies also pay out dividends which, on average, can yield six to seven percent returns on shares. This increase in share value is, of course, only received over the long term. If you had entered the market in 2008, your average return would have been a lot lower in the beginning.

As shown in vanguard’s chart below, equities have indeed achieved an average high return over the past period.

average return on equity

Shares, bonds or what else?

Of course, it is also possible to invest in something else than shares; nevertheless, research shows that shares on average have the highest returns. Professor Russell E. Palmer of the University of Pennsylvania states that in history shares have yielded much more than bonds.

If you had invested one dollar in 1802, it would have been worth USD 8,8 million in 2003! The yield on bonds would have been just $16.064, the yield on government bonds $4.575 and the yield on gold only $19.75. Please note that for this calculation dividends are reinvested.

So… should you always invest in shares?

It is clear that the average return on stocks is the highest. Does this mean that it is only sensible to invest in shares? No, that is a bit short of the point! Although shares generally have the best returns, they often also have the greatest risks.

If, for example, you were to invest one dollar in shares in 2008 and if you were to measure up to 2010, there would be very little left of it. So if you want to aim for a maximum return instead of an average return, it is wise to remember that individual securities can deviate significantly from the average. But how can you ensure that you achieve the highest possible return?

Pursuing the highest possible efficiency

If you want to achieve the highest possible return, individual analysis is required. In the long term, you can then look at shares that have been performing well for some time and pay out a stable dividend. If you want to invest for income you can buy shares in a company like Royal Shell. Still, you can achieve an even higher return by also focusing on the short term.

After all, you can achieve extremely high returns in the short term. Mass psychology plays an important role in this. When there is bad news, the masses often panic. By responding cleverly to this, it is sometimes easy for an investor to achieve a 100% return on a single investment. Take a look at the graph below; this was a good time to get involved!

Plus500 graph

If you want to take advantage of such big stock movements in the short term, it is wise to do so at an online broker. With Plus500 you can also make use of leverage. With leverage, you can take a large position with a smaller amount of money. Of course, you can also practice with a demo first. Use the button below to open a free demo account:

72% of retail CFD accounts lose money.

What is the difference between nominal and real returns?

If you only look at the average return, you do not have the complete overview. The average yield in America since 1900, for example, has been 10.1%. However, this is the rate of return before inflation. Inflation is the process by which prices increase every year. You can then buy less for the same amount a year later.

The real average return is the amount of return you have after deducting inflation. This return is a lot lower. For America, for example, this return on equities was 6.4% on an annual basis.

Is there any mention of an average return? Then always check whether it is the nominal or the real yield. Also, always check which measurement period is used. For example, many funds mention the average return from 2009 to 2019. The economic crisis of 2008 is then conveniently kept out of the calculation.

What is the average return per region?

You can also break down the average return by region. Not every region has performed equally well since 1900. Below is a graph showing the average annual real return. Australia has performed best, while European countries such as Italy and Belgium have not performed particularly well.

average return per region

When you invest, you can spread your risks over different regions. In this way, you avoid investing all your money in a region that doesn’t do so well on average.

What is the average risk-free rate of return?

When you invest, you get paid for the risk you take. There is also the so-called risk-free return. The risk-free return is the return you get with (almost) no risk. Usually, the average 10-year interest rate on government bonds is taken into account.

In the past, the average risk-free rate of return in Europe was still 4%. Today this rate is even negative! When the average risk-free rate of return is very low or even negative, investors are more likely to take risks achieving a positive return.

average risk free interest rate

Volatility on shares

Do not stare blindly at the average return on equities alone. After all, investments in shares can be very volatile. One year you can achieve a positive return of 30% while the next year you can achieve a negative return of 30%. That is why it is important to pay attention to the volatility of your return.

When you have a long investment horizon, high volatility is not a big problem. When things are not going so well, you just wait for better times. However, if you have a short time horizon, volatility can be a bigger problem. Are you stepping in at the wrong time? Then suddenly you can lose a large part of your capital. Do you have little time? Then it is wiser to invest in low-volatile securities.

A good way to reduce the volatility of your entire portfolio is by applying staggered entry. For example, invest a fixed amount every month in an index fund. In this way, you step in on both ups and downs and ensure that you achieve the highest possible average return.

Volatility of return on equity

What is the average return on bonds?

Some people prefer to invest in bonds. The average bond yield in America between 1926 and 2008 was 5.3%. It is therefore a good rule to assume a nominal average return of 5% in the long term.

When interest rates on bonds are very low, they no longer yield that much. In 2020, therefore, you will see that bond yields are not very high. Perhaps in a decade’s time, we will come closer to the historic average bond yield again.

Model portfolios & returns

By means of a model portfolio you can see what the average return would be in different situations. We have used the model portfolios as set up by Vanguard.

Defensive portfolios

Below you can see the results you would have achieved with a portfolio that consists almost exclusively of bonds. We also call this way of investing defensive. This name is used because the average volatility on bonds is lower. You can see the average return of a defensive portfolio in the image below:

average return defensive portfolio

average bond yield

Portfolios mix or neutral portfolio

People who can handle a little more risk and volatility often opt for a more mixed portfolio. This type of portfolio is also called neutral. You then have a solid balance between bonds and shares. The focus for this type of portfolio is on the medium term. Below you can see the results you could expect with this type of portfolio:

neutral average return

Offensive portfolio

If you have a long time (think of 15 to 30 years) you can consider an offensive portfolio. This way of investing focuses on growth. You then invest almost exclusively in shares. The average return is higher, but the volatility is also clearly higher. Below you can see what historical results you would have achieved with a more offensive portfolio:

Offensive portfolio average return

equities average return

Expected returns: what is a realistic return?

But what kind of investment return does the average investor actually expect? A survey carried out by Schroders showed that investors expect an average return of 10% and millennials even expect a return of 12%. These are quite high percentages. The chance that these investors will be disappointed is therefore high.

Older investors seem to have gained a more realistic picture over the years. The so-called baby boomers expect an average annual return of 8.6%. The older a person is, the lower the average return expected.

Professional investors seem to be able to make better estimates. Research has shown that they target around 5% on an annual basis. The expected average return also varies greatly per region. For example, people living in Indonesia expect an average return of 17.1% and people living in Italy 7.1%.

In the end, when you start investing, you must have realistic expectations about the average return you can achieve. Don’t expect too much! Disappointment is a bad advisor which can negatively affect your investing skills.

Beware of excessive expectations

Sometimes you read on the internet that parties promise an average annual return of tens of percent. When you read this, it is in any case important to be very sceptical. There are not many funds or parties that manage to achieve such high returns. Even one of the best investors in the world, Warren Buffett, achieves no more than 20% average annual return.

Therefore, always carry out extensive research into the source of the return. How realistic is it that this average return will continue to exist? Is it mere luck or is the strategy unique and very clever? A critical attitude is important for every investor.

Average return or historical return over the last 10 years

Are you curious about the average or historical return on, for example, shares over the past 10 years? In the graph below you can look at the development of the AEX. The AEX is one of the most important indicators of the Dutch economy. 10 years ago, the share price stood at 340 euros in 2010. In 2020, the share price will be at 600 euros.

Growth over this period is therefore EUR 260, or EUR 26 on an annual basis. This represents an annual growth rate of 7.6%. So, an investment in stocks would have worked well over the last ten years!

Average return 10 years

How can you calculate the return on investments?

You can easily calculate the return on your investments over a period of time. For this, you need the following data:

  • The price at which you opened your investment.
  • The current price of your investment.
  • The number of years.

You then go through the following steps to calculate your return:

  • Calculate the difference between the purchase price and the current price.
  • Divide this amount by the number of years you own the investment.
  • Then divide this amount by the price at which you opened the investment.

Let us explain this using the example given in the previous paragraph where the average return over 10 years was explained:

  • The difference between EUR 600 and EUR 340 is EUR 260.
  • Divide the amount by 10: 260/10 = 26 euros.
  • Divide it by the purchase price: 26/260=0,076.

In this way you calculate the nominal return on your investment. Do you want to know the real return? Then you still have to deduct the average inflation during the period from your return. If, for example, inflation is 2%, you subtract this from the average return.

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