compoundsimWhat Rate of Return to Assume for Long-Term Investing
What return to enter in a compound interest calculator: past S&P 500 and world stock returns by period, total vs real, currency, and why to test a range.
Published · Updated
What return to enter in a compound interest calculator: past S&P 500 and world stock returns by period, total vs real, currency, and why to test a range.
Published · Updated
There is no single right rate of return to assume for a monthly investment plan. The S&P 500 has returned about 10.8% a year with dividends reinvested since 1993 (in US dollars), or about 8.0% after inflation. But that figure moves by several points depending on which index you look at, which period you pick, whether you count inflation, and which currency you measure in. So rather than settle on one number, it is more realistic to start from a conservative rate and test a range around it.
Investing $500 a month for 20 years puts in $120,000. With the fixed-rate compound interest calculator, changing only the annual rate gives:
| Assumed return (yearly) | After 20 years | Of which growth |
|---|---|---|
| 3% | about $163,000 | about $43,000 |
| 5% | about $203,000 | about $83,000 |
| 7% | about $254,000 | about $134,000 |
Two points either way moves the 20-year total by $40,000 to $51,000. Counting only the growth, 7% earns more than three times what 3% does. With the rate moving the result this much, it is worth having a reason for the number you enter.
Annualized total returns of the main indices, in US dollars, calculated from the ETFs that track each index:
| Index | 5 years | 10 years | 20 years | Full history |
|---|---|---|---|---|
| S&P 500 | 13.7% | 15.2% | 11.1% | 10.8% |
| MSCI ACWI | 11.6% | 12.5% | — | 8.5% |
| NASDAQ-100 | 16.3% | 20.9% | 16.5% | 10.8% |
| US bonds | -0.6% | 1.1% | 2.9% | 2.9% |
Periods are the most recent years. The ETFs and the start of each full history are SPY for the S&P 500 (from 1993), ACWI for world stocks (from 2008), QQQ for the NASDAQ-100 (from 1999) and AGG, the US aggregate bond ETF, for US bonds (from 2003). World stocks do not have 20 years of data yet.
The same index can differ by several points between the last 10 years and its full history. Entering a high rate from a strong recent stretch assumes that stretch will continue. A period that starts in a slump, such as the early 2000s, comes out low instead. Stocks and bonds also differ widely, so if a plan holds bonds, it makes sense to lower the assumed rate in proportion.
For every index and period in detail, see the index data page.
The same index gives different rates depending on how you count.
The trap is computing with a nominal rate and then reading the result as if prices had stayed put. A million dollars in 20 years buys less than a million dollars today, by however much prices have risen. The fixed-rate calculator has a Real view that shows the result in today's money, with inflation taken out.
The returns in this article are for US-dollar ETFs. If you hold a fund like these without a currency hedge and count in your own currency, the movement of that currency against the dollar is added to the return: a stronger dollar adds to it, a weaker one subtracts. Currency-hedged funds also exist; they remove most of this effect, so the figures in this section do not apply to them.
For example, the S&P 500 returned 13.7% a year over the last five years in dollars and 21.8% a year for an investor counting in Japanese yen; over the full history, 10.8% in dollars and 11.6% in yen. The gap between the two depends on which way and how far the exchange rate moved over the period, and it tends to be wider the shorter the period. No one knows which way exchange rates will move over the long run, so it is safer not to take a figure lifted by the currency as your assumed rate, and to expect the currency effect to cut either way. The index data page shows the returns in the currency you choose, with the currency effect in a column of its own; inflation-adjusted returns are shown in US dollars only.
"Average annual return" and "the rate your money actually grew" are different numbers. For the S&P 500 over its full history, the simple average of each year's return is about 12.3%, while the rate the money actually grew at (annualized) is 10.8%.
The gap comes from the ups and downs. If $100,000 rises 50% in the first year it becomes $150,000; if it then falls 50% it is $75,000. The average return over the two years is 0%, yet the money is down 25%. The more an asset swings, the wider this gap.
The rate to enter in a fixed-rate calculation is the annualized growth rate, not the average. Entering the average makes the result look better than it would have been. The calculator converts the annual rate into the monthly rate that compounds to it over twelve months, so the annualized rate can go in as it is.
Every figure in this article is before tax, and the fixed-rate calculator does not deduct tax either. In a tax-free account, where gains are not taxed, they can serve as your reference for the assumed rate directly. In a taxable account, tax on dividends and on gains when you sell leaves you with less than the pre-tax calculation shows. The rules and limits differ by country, so check them for the account you use.