When you think about investing, it may be interesting to know the average return on investments. In this article we look at historical returns based on historical figures and we try to give an indication of the average return that you can achieve with investments on the basis of these data. Finally, we also explain how you can achieve more than the average return by investing wisely.
Average return on stocks
According to Warren Buffett, a famous stock trader, the average return on stocks should be between six and seven percent. According to him, the domestic product rises by an average of three percent over the long term and about two percent inflation comes on top of that. As a result, the nominal growth of the total economy is five percent.
However, companies also pay dividends, which means that securities should increase on average by six to seven percent. You naturally only receive this increase in equity value over the long term; if you got in the market in 2008, it would take a while before you are back on the average return.
As can be seen in the graph below of Vanguard, stocks have indeed achieved an average high return in the past period; apparently those with stocks are certainly making good money!
Stocks, bonds or something else?
Obviously it is also possible to invest in something other than in stocks. Nevertheless, research shows that stocks on average have the highest yield. Professor Russell E. Palmer of the University of Pennsylvania, for example, indicates that historically stocks have delivered much more than bonds.
If you invested one dollar in 1802, this would have been worth £8.8 million through equity investment in 2003! The yield on bonds would be only £16,064, the yield on government bonds would be £4,575 and the return on gold only £19.75. This assumes that the dividends are reinvested.
So... should you always invest in stocks?
It is clear that the average return on stocks is highest. Does this mean that it is only sensible to trade in stocks? No, that's jumping to conclusions a bit! Although stocks generally have the best return, they often also have the biggest risks.
For example, if you invested one dollar in equities in 2008 and if you measured up to 2010, then there would be very little left. So if you want to aim for maximum returns instead of an average return, it is wise to remember that individual results can deviate significantly from the average. But how can you ensure that you achieve the highest possible return?
The highest possible return
If you want to achieve the highest possible return, individual analysis is required. In the long term, you can then look at stocks that have been doing well for some time and are paying a stable return. Then invest in a company like Royal Shell. Yet you can achieve even higher returns by also focusing on the short term.
In the short term you can achieve extremely high returns. Mass psychology plays an important role here; in bad news, the masses often panic. By cleverly responding to this, as an investor you can easily achieve a hundred percent return on a single investment. For example, consider the graph below; this was another good time to step in!
When you want to take advantage of such huge increases in the short term, it is wise to do this with an online broker. With Plus500 you can try using leverage; you can also first get started by practicing with a demo. Click here to visit the website of Plus500 >>