Historical Rate Of Return For Stock Market
The historical rate of return for the stock market is approximately 12 percent per year. This is the rate of return that is usually taken as a benchmark when it comes to planning funding for pension, retirement and decisions related to investment and savings.
This 12 percent historical rate of return for stock market has been recorded between 1926 and present day. Whereas, the compounded historical rate of return stands at 10.7 percent. Although the compounded rate of return is more useful, the historical rate of return is taken as it is easier to use when it comes to calculating the return mentally. For example, the 12 percent rate of return when compounded over a period of 6 years, doubles the initial investment made; whereas the 10.7 percent takes 7 years to double the investment.
According to Professor Roger G Ibbotson, from 1926 to 2001, the compounded average rate of return per year for common stock is 10.7 percent, and this return is more than 5 percent a year what the long term US Treasury gives. Professor Ibbotson is from the Yale School of Management and he is often quoted as the source for historical return of the stock market.
On the other hand, certain financial magazines like Business Week believe that the historical rate of return for the stock market is 7 percent annually and this amount has been adjusted for inflation. However, Business Week does not quote a source or reference from where it came to this figure.
The historical rate of return for stock market is important as it allows investors to make a prediction of a trend. In order words, if the stock market is above or below the average rate of return for a long period of time (approximately 10 to 30 years), then there is bound to be a correction and the rate of return will then start moving towards the opposite direction.
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