The stock market’s average return has been around 10% annually in the last century. This figure drops to about 6.7% after accounting for inflation. Between 1926 and 2020, returns landed in the 8-12% range only eight times, which might surprise many investors.
Investors lost money in 26 of the past 93 years. The 2008 banking crisis led to steep declines of up to 38%. Market timing plays a crucial role in investment success. Missing just the top 30 trading months in the American market in the past 40 years would have reduced your returns from 11% to a mere 3%.
Long-term investors can find comfort in some encouraging data. A well-diversified portfolio held for fifteen years or longer has yielded positive returns consistently since 1950. The worst-performing fifteen-year investments during this period still managed to generate returns of nearly 4.25%.
Your stock performance assessment needs to go beyond basic averages. Let’s take a closer look at five straightforward steps to evaluate your investment returns and establish realistic expectations for your financial future.
Step 1: Define your investment timeline
A successful investment strategy starts with understanding your timeline clearly. You must answer one significant question before picking stocks or other investments: When will you need this money? Your answer shapes every investment decision you’ll make.
Investment timelines are split into three main periods. Each has its own risk profile, strategy, and expected outcome. Your goals fit into one of these categories, which helps you make smart decisions about your money.
Short-term vs. long-term goals
Short-term goals take less than five years. These could be for saving for a vacation, building an emergency fund, saving for a car down payment, or home improvements. You need quick and reliable access to your money for short-term goals.
Money you’ll need soon can’t face big risks, so protecting your principal becomes vital. Stock markets have lost money about 20% of the time in 12-month periods. This means stock investors see negative returns one out of every five years on average.
Medium-term goals usually last 3–10 years. These might include saving for a house down payment, your child’s education, or preparing for a career change. Medium-term goals need both growth and stability.
Long-term goals stretch beyond ten years. Retirement planning leads the list of long-term financial goals. Other examples include funding your child’s college education, building generational wealth, or reaching financial independence. The longer timeline changes how you approach investing.
Long-term investing lets you ride out market fluctuations. Stock markets tend to rise over time, but short-term drops can hurt your portfolio. Markets need time to recover, which makes long-term goals easier to achieve.
This time difference matters in real life. A study of 1,041 retail investors showed that those focused on shorter periods traded more often. The increased volatility led to higher fees and losses in investor welfare. The study found time frames didn’t change how much risk investors took.
How your timeline affects return expectations
Your investment timeline directly impacts the returns you can expect. You can take more risks with longer investment periods. The result means your potential returns grow as you become more comfortable with short-term market swings.
Short-term investments focus on keeping your money safe while earning modest returns. Suitable options include savings accounts, certificates of deposit, money market funds, and short-term bonds. These investments stay liquid and stable but offer lower returns than riskier choices.
Medium-term investors need balance between growth and stability. They often mix stocks and bonds to protect wealth from inflation. The returns usually fall between conservative short-term and aggressive long-term options.
Long-term investors can aim for higher returns by accepting more short-term ups and downs. Stocks have shown better returns over long periods. From January 1927 through February 2015, the U.S. stock market beat Treasury bonds by 6.2% each year.
Your timeline affects how you should view market changes. Short-term investors must watch market conditions closely since they have little time to recover from drops. Long-term investors can see market dips as chances to buy more instead of reasons to worry.
Time’s importance shows up clearly in historical results. In the past 82 years (through December 2024), every 10-year investment in the S&P 500 made money. But one-year investments lost money about 33% of the time over 91 years.
Time becomes even more powerful when we look at a €9,542.10 stock investment over 20 years. Staying invested the whole time earned 58% more than missing just the five best market days. Missing the 25 best days would have wiped out three-quarters of the potential value.
Long-term investors who want the best returns can expect 7-8% yearly from a globally diversified stock portfolio. High-quality bonds currently yield about 4%. These numbers help you set realistic goals based on your timeline.
Your timeline also affects how you calculate returns. Long-term investors benefit from compounding – when returns create more returns. A yearly €4,771.05 investment earning 7% grows to about €66,794.71 in 10 years but reaches nearly €453,249.81 over 30 years.
Setting your investment timeline isn’t about picking random dates. It helps you match your money strategy with your life goals and set realistic return expectations. Clear timelines let you make smart choices about risk, asset mix, and investment picks—all key parts of understanding your stock performance reality.
Step 2: Identify all sources of return
Most investors watch only stock price movements to review performance, but this narrow view can give you a distorted picture of true investment returns. Your portfolio’s actual performance depends on all sources of return that add to your overall investment results.
Stock returns come from multiple sources, not just price changes. Each source contributes differently based on your investment choices and market conditions.
Capital gains
You make capital gains by selling an asset at a higher price than your purchase price. This profit represents what comes to mind first when most investors think about stock returns – their holdings’ increased market value.
Let’s say you buy shares at $100 and sell them at $130 – your capital gain would be $30 per share. These gains are “realised” (and taxable) only after you sell the investment. They stay “unrealised” or paper profits until then and could vanish if prices drop before selling.
Capital gains fall into two categories based on how long you hold them:
- Long-term capital gains: Profits from investments you keep for more than a year. These usually get better tax treatment with rates of 0%, 15%, or 20% based on your income bracket.
- Short-term capital gains: Profits from investments you hold for a year or less. You pay your regular income tax rate on these, usually higher than long-term rates.
Tax implications can make a big difference in your actual returns. Starting in 2025, single filers earning above $46,136.06 and married couples filing jointly earning more than $92,272.12 must pay capital gains taxes. Your after-tax return gives you a more accurate picture of how your investments perform.
Several factors drive capital gains: company performance, market sentiment, economic conditions, supply and demand, global events, and investor psychology. These drivers help you figure out if your returns will last or might disappear quickly.
Dividends
Companies share their profits with shareholders through dividend payments. Unlike capital gains, you don’t need to sell shares to get this income – just own them.
Dividends constitute a big part of total stock returns, especially long-term. A $9,542.10 investment in an S&P 500 index fund at 1993’s end would have grown to $173,666.24 by 2023’s end with reinvested dividends, but only to $97,329.43 without them. This difference shows dividends’ massive impact on long-term results.
Key metrics help you assess dividend returns:
- Dividend yield: Annual dividend as a percentage of current share price. A stock paying $3.82 yearly at $95.42 has a 4% yield.
- Dividend payout ratio: Shows how much of a company’s earnings go to dividends. A balanced ratio points to sustainability.
- Dividend history: Companies that maintain or grow dividends show financial strength and commitment to shareholders.
Share prices react to dividends too. They usually drop by about the dividend amount on the ex-dividend date. A $50 stock might drop to $48 after announcing a $2 dividend since new buyers won’t get the upcoming payment.
Not every company pays dividends. You’ll find the most reliable dividend payers among large, established companies in basic materials, oil and gas, banking, healthcare, and utilities. Tech and biotech startups often put profits back into growth instead.
Tax rules split dividends into “qualified” and “ordinary” (nonqualified). Qualified dividends get the same tax breaks as long-term capital gains (0%, 15%, or 20% based on income), while ordinary dividends face regular income tax rates.
Currency effects (for international stocks)
Exchange rates create another return source for international stock investors. When you buy foreign stocks, you get returns from both the stocks’ performance in local currency and exchange rate changes between your home currency and foreign ones.
Currency effects can boost or cut your total returns. A weaker dollar helps USD-based returns because each unit of foreign currency buys more dollars. A stronger dollar hurts returns, as you get fewer dollars than before.
This trend played out clearly in the last decade. Currency exposure reduced international stock returns in eight of the 12 years from 2013 to 2024 as the dollar gained strength. However, from 2002 to 2011, during the period of a weaker dollar, currency fluctuations enhanced U.S. dollar returns in seven out of nine years.
Currency fluctuations have a significant impact. Strong local market gains can disappear with adverse currency moves, while average stock performance can turn excellent through advantageous exchange rates.
Currency shifts affect companies differently. A weaker dollar might hurt foreign companies that sell a lot in the U.S., while helping U.S. companies with large foreign sales.
Before deciding whether to hedge currency risk in international investments, think about these points:
- USD-hedged non-U.S. stocks mean buying in local currency plus betting on USD versus other currencies.
- Currency movements are unpredictable, and hedging can be likened to a coin toss that can yield both positive and negative results.
- Hedging costs money and can reduce your returns.
Currency effects tend to move in long cycles. Since Bretton Woods ended in 1971, we’ve seen six complete dollar cycles averaging just over eight years each. Neither always-hedged nor never-hedged strategies win consistently.
Understanding these return sources—capital gains, dividends, and currency effects—gives you a full picture of your investment performance. This knowledge helps you build better portfolios, plan for taxes, and check if your investments meet your financial goals.
Step 3: Measure your return against inflation
Raw investment returns can mislead you dangerously. A 10% portfolio gain might look great until you learn that inflation hit 7% in the same period. Your actual financial progress looks quite different in this light.
Real return vs. nominal return
You need to know two basic ways to measure investment returns: nominal and real. The difference between these concepts helps you assess your financial progress accurately.
Nominal returns show the basic percentage increase in your investment over time. Both financial news and your investment statements will display this figure. A $10,000 investment that grows to $11,000 in one year gives you a 10% nominal return.
Real returns tell a different story. They adjust nominal returns for inflation to show how much your purchasing power has changed. Nominal rates give you the headline numbers, but real rates reveal what your money can actually buy. The math is simple – real returns equal nominal returns minus inflation’s effect.
Here’s the formula for real return: Real Return = [(1 + Nominal Return) ÷ (1 + Inflation Rate)] – 1
Let’s see how the equation works. Your investment earned 10% in a year with 3% inflation. Your real return would be [(1 + 0.10) ÷ (1 + 0.03)] – 1 = 6.8%
The formula provides you 6.8%, not the 7% that you’d obtain by just subtracting inflation from nominal return. This small difference grows bigger with high inflation or larger gains.
The late 1970s and early 1980s showed the pattern perfectly. Savings accounts paid double-digit interest rates that seemed wonderful. But double-digit inflation ate away purchasing power just as fast. Prices jumped by 11.25% in 1979 and 13.55% in 1980, which made real returns much lower than nominal ones.
Why inflation-adjusted returns matter
Your financial decisions improve when you understand inflation-adjusted returns. Here’s why they matter.
First, they show your true wealth creation. Without this adjustment, you might think you’re getting richer when you’re just keeping up with rising prices—or worse, losing ground. A 5% return during 6% inflation means you’re actually losing money.
Second, they let you make meaningful comparisons between different investments and times. This helps especially when you look at investments across countries with different inflation rates. You can’t compare a 15% return from a high-inflation emerging market to an 8% return from a low-inflation developed market without this adjustment.
Third, they help you set realistic goals. Since 1926, the stock market has delivered about 7% annually after inflation. This historical standard helps you set reasonable expectations and avoid chasing risky returns.
Fourth, inflation hits investments differently. Stocks usually beat inflation over time, but cash and some fixed-income investments often struggle to keep up during inflationary periods. The S&P 500’s inflation-adjusted return averaged 8.1% yearly from 1992 until recent years.
Stocks have shown they can handle inflation well. They posted positive returns after inflation in twenty-two of the last thirty years. This record matters to investors worried about rising prices eating into their gains.
Inflation does more than just reduce purchasing power. It can slow economic growth, make money harder to borrow, push interest rates up, and lower stock values. At its core, inflation reduces what future earnings are worth today, which often leads to lower stock valuations.
Stock valuations tell this story clearly. They reach their highest points when inflation stays low and drop when inflation rises. This pattern shows why real returns matter, not just for past results, but also for predicting market behaviour.
Real returns give you better context for everyday decisions. A 6% fixed deposit might seem safe until you see that 5.5% inflation leaves you with just 0.5% real return. An investment boasting 70% returns over ten years looks less impressive after you factor in inflation over that decade.
Real returns matter most because they tell you if your investment strategy works. They show if you’re building actual purchasing power and financial security, not just collecting impressive-looking numbers.
Step 4: Use benchmarks to assess performance
Your inflation-adjusted returns only provide a partial picture. The real question is: how well are your investments performing compared to what you could expect? This brings us to measuring performance – comparing your investment performance against the appropriate standards.
Without good measuring standards, an 8% return might seem satisfactory. You might not realise similar investments are earning much more during that time. The opposite can happen too – you might feel uneasy about your returns during tough economic times when your investments are actually doing better than most alternatives.
Choosing the right benchmark
The best benchmark matches your portfolio’s makeup and risk level. If you own individual stocks, comparing your performance to a broad market index helps you understand if your picks are worth it.
Here are key principles for picking the right benchmarks:
- Match your investment universe – The S&P 500 won’t work well if you invest in small speculative stocks since it only has large-cap stocks. A globally diverse portfolio needs international indices rather than just domestic ones.
- Ensure benchmark quality —good benchmarks should be clear, transparent, investible, priced daily, and set beforehand. They need low turnover in their securities and published risk features.
- Line up with your objectives—your benchmark should match your investment goals, risk comforts, and cash needs. To name just one example, investors with inflation-linked obligations might pick the Bloomberg Euro Inflation-Linked Index.
Many investors default to the S&P 500 as their only benchmark. Yes, it is transparent and has lots of historical data, but it has big limits – it misses international markets, omits bonds and alternative investments, favours large companies, and can be heavy on certain sectors.
How ETFs can reflect market averages
ETFs have changed how everyday investors access market benchmarks. These funds follow specific indices, making them excellent tools for investing and understanding benchmark performance.
Most passive ETFs track a specific benchmark index. This lets investors directly compare their portfolio against market standards. An ETF following the S&P 500 gives you instant exposure to America’s 500 largest companies, serving as a practical measure for large-cap U.S. stock performance.
Look at these factors when comparing ETF performance to its benchmark:
- Tracking error—this shows how well an ETF follows its benchmark index. Some difference is normal, especially when ETF demand temporarily pushes share prices up or down.
- Fee impact: ETF costs will have lower returns compared to the theoretical benchmark. A passive ETF with 0.1% expenses tracking the S&P 500 should return the index minus that 0.1%.
- Beta relationship – This number, found on most investment websites, helps measure how your investment moves compared to its benchmark. A beta of 1.0 means your ETF moves exactly with its benchmark, while 0.7 suggests it moves only 70% as much.
ETF flow data gives us more insights. Studies show monthly equity ETF flows and S&P 500 returns have a negative correlation of 21.4% after one month. This positive correlation grows to 45.6% over two months and 52.4% over three months. This opposite relationship hints at possible investment timing chances.
When your return is actually underperforming
Your investments fall behind when they can’t keep up with proper benchmarks. Note that spotting underperformance isn’t always easy—you need the right context and comparisons.
The stock market has an intriguing twist: most stocks in an index actually do worse than the index itself. This happens because stock returns are positively skewed. A small group of high-performing stocks usually drives most market returns.
These stats might surprise you:
- From 1998-2017, the typical stock returned about 50% total (just 2.0% yearly), while the average was 228% (6.1% yearly).
- Over half of all stocks lost money during their lifetimes. Only 42% did better than 3-month Treasury Bills.
- Just five companies (Exxon, Apple, Microsoft, GE, and IBM) created 10% of all stock market wealth from 1926-2016.
- Only 4% of stocks generated all the wealth in the market during those 90 years.
This uneven spread explains why active managers often trail indices. Unless they own those few top performers, they’ll likely fall behind the market. Over 10, 15, and 20 years, 85.61%, 92.19%, and 93.58% of large-cap U.S. stock funds did worse than their benchmarks.
Comparing your results with an index helps you see if your investment approach adds value. If you keep falling behind proper benchmarks after counting fees and your specific strategy, you might need to rethink your approach or look at index-based options.
Measuring against benchmarks isn’t about feeling awful when you fall short temporarily. It gives you context to make smart choices about your investment approach and decide if changes might help you reach your financial goals better.
Step 5: Analyze your average stock return rate over time
Raw numbers alone won’t tell you if your investments are successful. You need to calculate your average returns correctly to make informed decisions about your financial future.
How to calculate your average return
Simple arithmetic averages are what most investors use. They add up yearly returns and divide by the number of years. To cite an instance, if your investment returns 10%, 15%, 10%, 0%, and 5% over five years, you’d get an arithmetic average of 8%. This method doesn’t give you the full picture.
The geometric mean gives you more accurate results because it factors in compound growth. This calculation only works with the returned numbers, which makes it perfect for analysing past performances. The money-weighted rate of return (MWRR) also takes into account how much money moves in and out of your account and when it happens.
What a 7% return really looks like
Stock returns have stayed between 6.5% and 7.0% yearly after inflation since 1800. This pattern holds steady despite market ups and downs. The S&P 500 averaged 9% in nominal terms from 1996 to mid-2022, or 6.8% after inflation – right in line with historical patterns.
Let’s put this information in real terms. A €95.42 investment in the S&P 500 back in 1957 would grow to €91,604.17 by September 2025. After inflation, that same investment would be worth €7,919.94 in actual buying power. This chart shows why most financial advisors suggest using a 6% yearly return estimate for long-term planning.
Common mistakes in return calculation
We often misunderstand how compound returns work. Many investors think they break even after a 13.7% loss followed by a 13.9% gain. The truth is, their investment would be worth less than what they started with.
Hidden costs eat into returns, too. Broker fees and taxes can affect your final results by a lot. A 150% gain might shrink to just 37.45% once you subtract broker fees and a 25% capital gains tax.
Short-term thinking leads to mistakes. Stock returns swing wildly year to year but level out over time. One-year returns ranged from -37% to +52.62%, while all 20-year periods returned at least +6.53%. Patient investors who stick to their strategy usually end up ahead.
Final Thoughts
Stock performance analysis needs more than just a surface-level review. Through this experience, you’ll learn that the five key steps paint a complete picture of your investment’s success. Your investment timeline shapes expected returns, as longer horizons have shown more consistent positive results. It also helps to spot all return sources—capital gains, dividends, and currency effects—which reveal hidden performance aspects that simple price tracking misses.
Your financial progress depends on real returns, not nominal figures. That impressive 10% gain might only represent 4-5% in actual purchasing power after accounting for inflation. Matching returns to appropriate standards provides essential context. Most individual stocks actually lag behind their indices, which makes proper comparison vital to realistic review.
The path to investment clarity ends with calculating returns correctly. The geometric mean and money-weighted rate reflect your actual results better than simple arithmetic averages, especially with deposits and withdrawals over time.
These five steps change how you review investment success. This knowledge helps you make smarter portfolio decisions, understand market movements better, and set realistic return expectations. Patient investors who follow these principles have historically earned rewards, whatever the short-term market swings might bring.
Stock performance review might look complex at first, but this systematic approach makes it simpler while offering more profound insights. Your financial future relies not just on earned returns, but on knowing how to understand what those returns mean.