A:

According to historical records, the average annual return for the S&P 500 since its inception in 1928 through 2014 is approximately 10%. However, that number can be very misleading. If an investor thinks that translates to just putting money in the S&P 500 Index and watching it double about every 10 years, he is likely in for a rather big disappointment. Accurate calculations of average returns, taking all significant factors into account, can be challenging.

The S&P 500 is a collection of 500 stocks intended to reflect the overall return characteristics of the stock market as a whole. The stocks that make up the S&P 500 are selected by market capitalization, liquidity and industry. Companies to be included in the S&P are selected by the S&P 500 Index Committee, which consists of a group of analysts employed by Standard & Poor's.

The index primarily mirrors the overall performance of large-cap stocks. The S&P 500 is considered by analysts to be a leading economic indicator for both the stock market and the U.S. economy. The 30 stocks that make up the Dow Jones Industrial Average were previously considered the primary benchmark indicator for U.S. equities, but the S&P 500, a much larger and more diverse group of stocks, has supplanted it in that role over time.

It's difficult for most individual investors to actually be invested in the S&P 500 since that would involve buying 500 stocks. However, investors can easily mirror the index's performance by investing in an S&P 500 Index mutual fund or exchange-traded fund.

One of the major problems for an investor looking at that 10% average return figure and mistakenly expecting to realize a nice yearly profit from investing in the S&P 500 is inflation. Adjusted for inflation, the historical average annual return is only around 7%. There is an additional problem posed by the question of whether that inflation-adjusted average is accurate since the adjustment is done using the inflation figures from the Consumer Price Index (CPI), whose numbers many analysts believe vastly understate the true inflation rate.

For an individual's investment success, when he chooses to enter the market makes a significant difference. The stock market performed very well for an investor who bought stocks between 1950 and 1965, but the market was nothing but a continuous 15-year disappointment for an investor who entered in 1965. The market's best sustained performance was from 1983 to 2000.

A significant detail about the historical S&P returns is that nearly half, over 40%, of the gains made over the years come from dividends. Calculating in the effect of an investor reinvesting all dividends received would render the historical performance figure substantially higher.

RELATED FAQS
  1. What are the pros and cons of using the S&P 500 as a benchmark?

    Learn about the advantages and disadvantages of using the S&P 500 as a benchmark for portfolio performance, and understand ... Read Answer >>
  2. How are S&P 500 index components weighted?

    Learn about how components of the S&P 500 are weighted, and how this calculation favors certain stocks in being more representative ... Read Answer >>
  3. What is the history of the S&P 500?

    Discover the history of the S&P 500, which sophisticated market participants consider to be the best index to understand ... Read Answer >>
  4. Where can I find a list of all of the stocks in the S&P 500?

    The actual list of all 500 stocks in the S&P 500 is called the Constituent List. It can be found on the official Standard ... Read Answer >>
  5. What's the difference between the Dow Jones Industrial Average and the S&P 500?

    The major difference between these two indexes is that the Dow Jones Industrial Average (DJIA) includes a price-weighted ... Read Answer >>
  6. What is the difference between the S&P 500 and the Fortune 500?

    Learn what the Fortune 500 and S&P 500 are, how the companies are chosen to be on the lists, and the main difference between ... Read Answer >>
Related Articles
  1. Markets

    S&P 500 Index: A Performance Analysis of Long-Term Returns

    Discover how to gain insight into the returns generated by the S&P 500 Index over the long term and how this can assist your investment goals.
  2. Investing

    4 Strategies to Short the S&P 500 Index (SPY)

    Learn the advantages and disadvantages of methods available to investors with the objective of making a bearish bet on the S&P 500 Index.
  3. ETFs & Mutual Funds

    SSO vs. UPRO: Comparing Leveraged U.S. Equity ETFs

    Discover how the leveraged exchange-traded-fund SSO compares to UPRO, and determine which one is the right fit for your portfolio in a bull market.
  4. Markets

    S&P 1500 Index: A Revenue Case Study

    Learn what comprises the S&P 1500 and how analysts use revenue trends to benchmark against the performance of a portfolio or single stock investment.
  5. ETFs & Mutual Funds

    The 4 Best Mutual Funds to Short the S&P 500 (RYURX, RYTPX)

    Discover the four best mutual funds for shorting the S&P 500 and learn which funds may be suitable for your portfolio during a market sell-off.
  6. Investing

    4 Benefits of Holding Stocks for the Long Term

    Discover some of the benefits that come from buying and holding stocks for longer periods of time, such as tax savings and risk minimization.
  7. Financial Advisor

    The 4 Best S&P 500 Index Funds

    Discover detailed analysis of the best S&P 500 Index funds, and learn about their characteristics, historical statistics and suitability.
  8. Investing

    Smart Beta Strategies: Comparing a U.S. vs. Global Approach (VT, VGTSX)

    Examine the importance of investing in stocks outside of the United States. Portfolio theory indicates that a modest portion should be invested in global stocks.
  9. Investing

    What's a Market Index?

    A market index combines several stocks to create one aggregate value that’s used to measure a market’s or sector’s performance.
  10. ETFs & Mutual Funds

    What are Index Funds?

    An index fund is a type of mutual fund that is tied to a broad stock index like the S&P 500 or the Dow Jones Industrial Average, instead of being handpicked and managed by an investment manager. ...
RELATED TERMS
  1. Standard & Poor's 500 Index - S&P 500

    An index of 500 stocks chosen for market size, liquidity and ...
  2. S&P Phenomenon

    The tendency for a stock that has been recently added to the ...
  3. S&P 600

    An index of small-cap stocks managed by Standard and Poor's. ...
  4. Total Return Index

    A type of equity index that tracks both the capital gains of ...
  5. Index Fund

    An index fund is a type of mutual fund with a portfolio constructed ...
  6. Average Annual Return - AAR

    A percentage figure used when reporting the historical return, ...
Hot Definitions
  1. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  2. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  3. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  4. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  5. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  6. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
Trading Center