What’s considered a “good” return on your investments depends a lot on the kind of investor you are. For example, if you’re investing more conservatively—because you need your money soon or the thought of losing any amount keeps you up at night—your expected rate of return will be lower than a more aggressive investor may be after.
Still, there are some ways to gauge how your money is doing, starting with the inflation test.
What’s inflation again?
Inflation is just another way of saying that prices are going up and, therefore, the value of our money is going down. (What you can buy with the same $20 bill, for example, decreases as prices rise.) In 2018, the average year-over-year inflation rate was 2.4 percent. So for your money to not lose value over the course of 12 months, you need to grow it by at least that much.
You probably won’t get there with a savings account. While the highest-paying online savings accounts offer about 2 percent now, the average account pays just under .10 percent. To actually grow real wealth, the long-term average of your investment returns should beat inflation.
And investing in the stock market can do that?
Over the long term, yep. While in the short term, stock prices can fluctuate a lot, the 90-year average for the S&P 500-stock index (an index generally considered to be a benchmark for overall market performance) is 9.8 percent a year. While you can’t invest directly in that or other indexes, investing in exchange-traded funds that track them allows you to mirror those returns.
So a good rate of return is equivalent to the S&P 500’s?
Maybe, maybe not. If you’re only invested in an S&P 500 index fund, your returns may look pretty similar. But a well-diversified portfolio includes other types of investments, such as international stocks and bond funds, in an effort to help smooth out some of the bumps you can expect from only investing in U.S. stocks. This helps increase the likelihood that your portfolio can continue growing steadily over time, despite short-term market movements.
If your portfolio doesn’t seem to be gaining value in the short term, take a step back and look at the big picture. Bumpiness in the markets is perfectly normal. But every U.S. market downturn in history has ended in an upturn, helping long-term investors beat inflation and grow wealth well beyond that.
February 28, 2019