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You may have heard the phrase, “12% return on investment.” And whether you first heard Dave mention it in 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 you really get a 12% return on mutual fund investments, even in today’s market?
If so, what mutual funds should you choose?
We’ll answer those questions, but let’s cover a couple of other questions first.
Where Does the Idea of a 12% Return on Investment Come From?
When Dave says you can expect to make a 12% return 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 New York Stock Exchange—it’s often considered the most accurate measure of the stock market as a whole.
The current average annual return from 1923 (the year of the S&P’s inception) through 2016 is 12.25%.(1,2) That’s a long look back, and most people aren’t interested in what happened in the market 80 years ago.
So let’s look at some numbers that are closer to home. From 1992 to 2016, the S&P’s average is 10.72%. From 1987 to 2016, it’s 11.66% In 2015, the market’s annual return was 1.31%. In 2014, it was 13.81%. In 2013, it was 32.43%. (3)
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So you can see, 12% is not a magic number. 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”?
Until 2008, every 10-year period in the S&P 500’s history has had overall positive returns. However, from 2000 to 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.” (4)
But that’s only part of the picture. In the 10-year period right before that (1990–1999) the S&P averaged 18% annually.(5) Put the two decades together, and you get a respectable 8% average annual return. That’s why it’s so important to have a long-term view about investing instead of looking at the average return each year.
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%!
If You Are on the Fence About Investing . . .
Will your investments make that much? Maybe. Maybe more. But the idea is that you invest for the long haul. Following Dave’s investing philosophy has inspired tens of thousands of Americans to start investing in order to reach their long-term financial goals
Don’t let your opinion about whether or not you think a 12% return is possible keep you from investing.
Related: How to Hire a Financial Advisor
How to Invest in Mutual 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 the right mix of 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. This is yet another value of a professional—they can help you keep your cool in tough times and focus on the long term.
In fact, increasing your investments during down markets may help drive total return on investment in your portfolio. It’s important not to be scared by the short term (or chase performance spikes). Remember, investing is a marathon—it takes endurance, patience and will power, but it will pay off in the end.
Discuss your investing concerns and goals with an investment professional in your area today!