Rate of Return

What Return Should I Expect From My Investments?

BECU Investment Services

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The irony of stock market forecasting is that it may be easier to try to predict market performance over the next few decades than to anticipate what it will do within the next year.

It's true there's no guarantee on funds you invest in the stock market. But over time, the S&P 500 (Standard & Poor's benchmark of 500 index stocks) has gone up in nearly 70%* of years. This means the stock market has historically tended to gain in value more than it loses. But by how much?

Average Rates of Return on Investments (ROI)

Since 1965, the S&P 500 has produced total annual returns (including dividends) of 9.7%.** However, it's important to remember that stock market prices change by the minute, making it difficult to calculate an exact rate of return for investors. Returns are also highly dependent on individual stock performance, with some shares losing value and not recovering. Recent forecasts by investment firm Goldman Sachs anticipate stocks will climb just 3% more by the end of 2018 and go up about 5% by 2019.***

Index Benchmark Average Annual Total Returns in 2018

Consider evaluating how well your investments are performing relative to market averages by comparing your annual rate of return to standard industry benchmarks. Here is a snapshot of leading stock, bond and money market index performance benchmarks for the last 10 years as of 9/30/2018.

Investment Index
1 Year 3 Years 5 Years 10 Years
Municipal Bonds
0.35%
2.24%
3.54%
4.75%
U.S. Treasury Bonds (5-10 Year)
-2.52%
-0.04%
1.55%
3.48%
Russell 2000 (Small-Cap Stocks)
17.91%
17.31%
13.95%
11.97%
Russell 2000 (Small-Cap Stocks)
15.24%
17.12%
11.07%
11.11%
Money Market Funds
0.94%
0.39%
0.23%
0.15%

Source: Vanguard®

Indexes used: BloomBarc Municipal Bond Index; BloomBarc US 5-10 Yr Treasury Index; S&P 500 Index; Russell 2000 Index; US Gov't Money Market Funds Average

All indices are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. Past performance is no guarantee of future results.

The Low-Risk, Low-Return Trap

Remember that inflation eats away at the value of a dollar, whether it's invested in the stock market or saved in a federally insured financial institution. But unlike saving, which offers little to no return, investing in higher-risk, higher-return securities can provide sums large enough to exceed inflation--especially over many years. The tradeoff is the risk of financial loss should your investment drop in value.

Higher returns can provide a buffer from both inflation and temporary dips in market prices—but only as long as your investments continue to grow in value. The alternative of holding only low-risk, and therefore low-return, investments limit your total potential returns, subjecting you to greater potential loss of purchasing power due to inflation. Maximizing growth while limiting your risk of financial loss involves a delicate balance of attempting to find the best performing combination of high- and low-risk investments. See our article on Managing Risk in the Stock Market for tips on how to diversify your investments.

Rule of 72: Easy ROI Calculation

When developing your investment strategy, it may be helpful to determine what rate of return you'll need from your investments to reach your financial goals. Use the easy-to-remember "Rule of 72" to calculate approximately how long it will take you to double your money. The formula is simple: Divide the number 72 by the annual expected rate of return to get a rough estimate of how many years it will take to double your return on investment (ROI).

72 ÷ (Annual Rate of Return) = Years Needed To Double Investment

A rate of return of 7% will double your money in just over 10 years (72 / 7 = 10.29). Compare that with a lower rate of return, such as the 3% annual average historical returns from bonds, which would take about 24 years to double your initial investment--more than twice as long.

Keep in mind that the Rule of 72 is not an exact calculation. It's most accurate for low rates of return but becomes less so the higher the rate. Consider consulting with a Financial Advisor and developing a more in-depth financial plan before investing to help determine your ideal rate of return and an appropriate investment strategy for you.

Ready to Invest? We Can Help!

If you are looking for a better understanding of your financial goals and strategies to pursue them, the Financial Advisors**** from BECU Investment Services can help you create your personal investment plan. Click here to set up a complimentary consultation or call 206-439-5720.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

CDs are FDIC Insured to specific limits and offer a fixed rate of return if held to maturity.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

Stock investing involves risk including loss of principal.

*Royal, James. "What Is The Average Stock Market Return?" 28 February, 2018. NerdWallet.

**Frankel, Matthew. "What Returns Should I Expect From My Stock Investments?" 11 October, 2017. The Motley Fool.

***Cox, Jeff. "Goldman Sachs: Weak stock market returns are ahead even with booming earnings," 21 June 2018. CNBC.

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