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Twelve percent—whether you first heard Dave mention it in the Financial Peace University or you read it on daveramsey.com, it was undoubtedly followed by questions.
But most of those questions boil down to two important ones: “Can I really get a 12% return on my mutual fund investments, even in today’s market?” and “If I can, what mutual funds should I choose?”
Where Does It Come From?
When Dave says you can expect to make 12% on your investments, he’s using a real number that’s based on the historical average annual return of the S&P 500. The S&P 500 gauges the performance of the stocks of the 500 largest, most stable companies in the Stock Exchange. It is often considered the most accurate measure of the stock market as a whole. The current average annual return from 1926, the year of the S&P’s inception, through 2011 is 11.69%. That’s a long look back, and most people aren’t interested in what happened in the market 80 years ago.
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So let’s look at some numbers that are closer to home. From 1992–2011, the S&P’s average is 9.07%. From 1987–2011, it’s 10.05%. In 2009, the market’s annual return was 26.46%. In 2010, it was 8%. In 2011, it was -1.12%.
So you can see, 12% is not a magic number. But based on the history of the market, it’s a reasonable expectation for your long-term investments. It’s simply a part of the conversation about investing.
But What About The ‘Lost Decade’?
Dave often points out that every 10-year period in the market’s history has made money, and that was true until the latest market drop in 2008. From 2000–2009, the market endured a major terrorist attack and a recession. S&P 500 reflected those tough times with an average annual return of 1% and a period of negative returns after that, leading the media to call it the “lost decade.”
But that is only part of the picture. In the 10-year period right before that, 1990–1999, the S&P averaged 19% annually. Put the two decades together, and you get a respectable 10% average annual return.
But that’s the past, right? You want to know what to expect in the future. In investing, we can only base our expectations on how the market has behaved in the past. And the past shows us that each 10-year period of low returns has been followed by a 10-year period of excellent returns, ranging from 13% to 18%!
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If You’re Still Unsure…
Will your investments make that much? Maybe. Maybe more. But the idea here is that you invest and invest for the long haul. Don’t let your opinion over whether or not you think a 12% return is possible keep you from investing.
In fact, if you’d rather project your mutual funds to grow at 10% or 8%—that’s cool with us. Just set a goal and invest whatever you need to in order to meet that goal.
How To Find Your Funds
It’s not difficult to find several mutual funds that average or exceed 12% long-term growth, even in today’s market. An investing professional can help you find good mutual funds.
But the value of a professional doesn’t end there. The stock market will have its ups and downs, and the downs are scary times for investors. They react by pulling their money out of their investments—that’s exactly what millions of investors did as the market plunged in 2008. But that only made their losses permanent. If they’d stuck with their investments like Dave advises, their value would have risen along with the stock market over the next two years.
Discuss your investing concerns and goals with a professional in your area.