Stock markets function on investors / traders purchasing stock, options, futures or any other kind of security in order to trade it for a higher value and generate revenue through this act of buying and selling. While the stock market functions go into severe and more detail alongside complicated processes, this sums up the end result. The trader purchases a commodity or security at a given price based on his research, technical analysis and expertise, and then sets a target at which he hopes to sell the stock in order to multiply his funds.
The difference between the price he purchased at and the price he sold at, is what is known as the returns. In a year, averaging an investor’s portfolio can give you his average return on stocks annually or historically, averaging the returns earned on companies traded in a particular industry can give you the average market return for that industry. But, as it turns out, the stock market, as one vass expansive entity, also has an average rate of return, or the average stock market return. So, what is the average stock market return?
The simple answer? Somewhere between 9.2% to 10%. However, as is with most things stock market related, there is more to it than just that.
The average stock market return
Goldman Sachs’ data shows that historically, over the course of the last one hundred and forty years, the average rate of return for any 10 year period has been at about 10%. However, the S&P index is shown to have fared slightly better, at 11,2%. However, these figures are based on the american stock markets. The data for the Indian stock market is a little more reserved and not as readily available.
Records show that ever since the NSE was incorporated by SEBI in 1992, the average stock market return for the NSE is around 17%.
However, there is a reason that there exists no official number on the average stock market returns in general, due to the fact that from the get go, these figures tend to be extremely misleading and not representative of the real picture. Let’s look a little further.
The Rate of Return is not as it seems.
Put simply, the reputation of the average market return of a stock market is bolstered by the rule of averages. However, if one were to inspect more closely, things would fall into a more accurate perspective for a number of reasons.
No two years are the same.
The world ‘historical’ in ‘historical’ average return on stocks for a stock market is a giveaway as to how people could be misled to other conclusions, such as the 10 percent average return on stocks means the average market return for each year was around 10%. However, this is not the case at all. For instance, the average stock market return for the year 1989 was 31.5. The rate of return for the very next year however, was -3.1%. This is a clear indicator that the average is the result of over 100 years’ average market return being evened out to arrive at the 10% figure.
The average stock market return is too broad a category.
This means that the average stock market return, say 10% for the sake of this example, represents the rate of return of the entire stock market. This means that industry a, b c, d e, among others, are being clubbed and averaged all together. However, despite the average stock market return being 10%, this could also very easily mean that industry a has a return of 2%, b a return of 3% and C, -6%. D and E however, give returns of say 16% and 28% respectively. This would mean that despite the average stock market return being 10%, unless you invest in only d and e, you stand to make minimal gains if not a loss. While diversification is the key to mitigate risk in the stock market, almost no trader has the willingness nor the ability to invest in every single aspect of the stock market. Therefore, even if we more accurately filter the average stock market return to a fewer section of years, this additional hurdle arises.
The average stock market return is an indicator over the rate of return a stock market has given since its inception. While this figure might lead to optimistic or skeptical claims about the market, one must keep in mind that it is a very broad statistic that cannot be acted up on its lonesome, and any strategies planned out around this figure should ideally include other market research and analysis.