In posts like The Best Way to Maximize Your Investment Return and How a Side Hustle Business Can Get You to Financial Independence in 10 Years I use 8% as a long-term return percentage when doing investment growth projections for stock index funds.
Many sites will use 10% since it’s around the historical long-term return of the stock market. And, of course, Dave Ramsey uses 12%, much to the chagrin of many money bloggers.
I like to be conservative, so I use 8%.
Lately when I’ve done this, someone will chime in with a question about 8%.
Here are some examples:
“I would like to know how you can make 8% on your money at a time like this. It seems rather difficult.”
“I’m enjoying your posts (great ideas)! But where do you find investments that pay 8% these days? Curious.”
“Where does one get an 8% return every year? Let’s talk about that!”
Some of these questions are sincere (like the first two) while some seem like they might be snide (like the last one), though it’s hard to tell.
So I thought I’d post some thoughts on an 8% return rate. Then if anyone asks about it in the future I can simply point them to this post.
Quick Responses to 8% Return
Let’s begin by documenting some quick responses I’ve left on other posts.
I have responded to a few of the 8% comments above. Here’s one of my responses:
There’s a big difference between making 8% on your money “at a time like this” (i.e. “now”) and making 8% on your money over a 10-15 year period.
IMO, you need to invest for the long haul to get decent returns and minimize risk. If you do that, there are several options.
And here’s another:
Well, first of all, I get 10% every year on my real estate investments.
Second, and I don’t know if you’re trying to be snarky or not, but it sounds like it, you don’t get 8% EVERY YEAR in the stock market (if that’s what you’re asking).
Some years you get 20%, some you get 3%, some you lose 10%, and so forth. Invest for a long period of time and 8% is a reasonable return (stats will say the average is more like 10%).
Those tell part of the story, but not everything.
Thoughts about 8% Return Rate
So here are my more-complete thoughts on an 8% return rate:
- The 8% return rate I use is based off primarily stock index fund investments (75% stocks or higher).
- The rate is much lower than what the stock market has shown historically (as noted above) because I like to be conservative.
- The number is based on a LONG TERM investment in the market (i.e. 10 years or more.)
- This return is not guaranteed, just like most investments aren’t guaranteed. You could earn 8% over 10 years but you could also earn 6%. Or you could lose money. Or you could earn 15%. No one knows — that’s the nature of investing.
- If you’re looking for an investment that you can make today that’s guaranteed to return 8% to you while also being completely liquid, you won’t find it. So if you want to earn 8% “these days” (which seems like it has a short-term focus), then you’re out of luck.
- I have NEVER said you would earn 8% every year. If you look at the market, you’ll see that some years the returns are high and some they are low (or even losses). They might AVERAGE 10%, but there are few years indeed where the market earns exactly 10%. In my example, 8% is the same way. It’s not 8% every year, it’s an average of 8% over a decade or more.
- While there’s data that says 10% or 12% is realistic, we could have losses for the next 10-20 years. We also could be above those numbers for the next 10-20 years. No one knows! Investing is inherently risky, so you do it hoping for a good return but knowing you might lose everything.
- You can give yourself the best opportunity to maximize investment returns by putting your money in low cost index funds. I prefer those from Vanguard.
Those cover my general thoughts on why 8% is a valid number and the various caveats associated with it.
My Personal 8%
But now let’s address 8% from a more personal side. We’ve seen that the stats say it’s possible to earn more than 8%, but how valid is that for me?
Consider the following:
- I earn 10% or more on my rental properties. This is income alone. On top of that, I have more returns in the form of appreciation. Of course I invested in these properties over five years ago — this was not something I did last night.
- According to this calculator, over the past 25 years (my investing career) the S&P 500 has returned 9.436% with dividends reinvested. This includes the 2008 meltdown, of course. I haven’t calculated my exact return but my guess is that I’ve earned close to this investing in the market.
So it can be done. But it has to be done over the LONG TERM and is not guaranteed. Anyone looking for short-term, guaranteed investments of 8% are going to be hard-pressed to find them.
The Next 20 Years
And to end, it’s worth saying again: as for where the market will be in one, three, five, or more years — I have no idea. No one does.
My guess is that over 10 to 20 years it will be up roughly 8% to 10%. But I could be wrong. Again, no one knows.
Hopefully this will answer any questions people have about why I use an 8% return rate.
Anything to add that I may have missed?
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Comments
Alex C saysIt’s tough to give a return number in the context of PF. I would take an 8% total market return (inc dividends) as being reasonable.
However Real Estate is also a common investment. This exhibits larger ‘alpha’ risks or greater standard deviation of return (as diversification is harder) in geek finance speak. Moreover the leverage used plays havoc with the return numbers. Without being in full rant mode, property investments tend to be more highly leveraged in the initial years after ownership and have greater and this declines as inflation takes hold. Price visibility is murky.
Most persons will have times where they keep more cash or pay down debt, these options typically have a returns less than 8% but reduce risk.
In short, an estimated rate of return is a complicated animal. Even if we could calculate it, a ‘blended’ or personal rate of return may be more useful.
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- ESI says
If I used my personal rates of return, I’d use 10% for stocks and 15% (counting appreciation — 10% without it) on real estate…then I’d really have problems with readers! 😉
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- Ten Factorial Rocks says
For a PF plan, where you are today – the starting reference point – is critical to determine future returns. A planner starting in Jan. 2000 faced near-0% return for the next decade, giving the name “lost decade” in the industry. That’s because of extreme over-valuation, not just in crazed internet stocks but even in bellwether dividend stocks at 40-50 PE.
While I also got double-digit returns in the past several years with a very high stock allocation, going forward, I don’t rely on it for planning purposes. I use 6% total return (incl. dividends) for the coming 30 years. Some might see it as needlessly conservative but I would rather check my FIRE strength using this rather than higher. In some simulations, I have run as low as 4% forward returns, which is close to what my stock portfolio generates in dividends alone.
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- Brian Vroomen says
I don’t think you are being too conservative. I actually think 6% is too high!
If you have ever looked up the statistics on the US economy and the government, its a scary picture. Mathematically speaking, you cannot have an economy that grows forever. When it stops, no one can tell, but it has to at some point. You cannot keep having 4% increases in GDP because at some point, people just can’t buy anymore, and sadly probably because they can’t borrow any more money to purchase things. What if we have another 2008/09 like (or worse) recession? What if we have another 10 year period with a net 0% return? I saw my investments drop and go back to break even 10 years later. What if this is the year that it drops again 50% but this time is different and it takes 20 years to recover?
I have moved most of my investments out of the market into private REITs, private hybrids, Private and publicly traded Mortgage Investment Corps and private 1st mortgages. My returns are ranging between 7-12% annually between all 3 types. I sleep well at night with no concern about my share values or what they will be worth in 10 years regardless of where the market goes.
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- Chadnudj says
One factor I think you’re missing here is the impact of dollar-cost averaging. You, currently, are in the decumulation phase (or at minimum are in less of an accumulation phase than you once were) — with all your money invested and relatively little new money coming in, that 8% long term return is probably a good rough projection.
The advantage for those in the accumulation phase is that you’re (more likely) buying significant amounts of investments at regular intervals with a set amount of money (i.e. your payroll deduction for 401ks, etc.) The market is going to be long term upward, but volatile in the meantime, which means you’re likely to be accumulating shares during dips at discounted prices that, when the market bounces back, ups your return.
A simple example: Joe buys $100 of an index fund every month. In month 1, the index fund costs $10; he buys 10 shares. In month 2, it’s down to $5; he buys 20 shares. In month 3, it’s at $15; he buys 6.5 shares and has $2.50 leftover.
Total return in terms of price from month 1 to month 3 is 50% ($10 to $15). But financially, Joe’s shares plus that $2.50 are worth $550 (36.5 shares X $15 = $547.50 plus $2.50 = $550) on his $300 investment — a return of 83.3%.
When you’re dollar cost averaging, you’ve got a chance to buy on some dips and exceed the straight up market return.
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- ESI says
We’re only two comments in so far but I think I see my point being made:
No matter what number I pick, someone will suggest I use another one. Ha!
That’s why I think 8% works. It’s a reasonable, nice round number estimate.
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- Chadnudj says
No! I agree with your selection of 8%! 8% is a good number, and relatively conservative BECAUSE it’s a good number for total returns when you are NOT dollar cost averaging, but even MORE conservative when you DO factor in boosts you may get when you’re dollar-cost averaging in the accumulation phase.
FWIW, I use 6%-7% in my forecasting, to reflect long-term real returns, factoring in long-term inflation. Just seems easier to do calculations in today’s dollars, by your mileage may vary.
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- ESI says
OK, I see now. We are on the same page. 🙂
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- Jeff B. says
I use 7% and I am getting 10.6% overall at Vanguard. I don’t want to get too greedy and start using 9%, but happy when I update the spreadsheet at the end of the year and it is more than I had projected. The next down cycle will probably hurt a bit, but hopefully it is still a few years away.
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- Nick says
Which Vanguard funds are you using?
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- JeffB MI20 says
VTI, VB, VUG mainly
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- Apathy Ends says
I was leaning towards using 8% in our upcoming calculations and this confirmed my assumption – more conservative than the 10% average the market has returned(if I could find 12 with Mr R I would be pretty pumped)
Thanks for the explanation
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Up to this point, I’ve been super conservative in my estimated returns. I generally use 6-7%. Based on my research, there are arguments for anything between 6% and 10% (12% I think is insane) so I go with the lower end to account for inflation and fees.
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- whiskey says
Not to be snarky but maybe the point should be: “Be glad you are able to save. Be glad that you are getting a return.”
I see more and more of that kind of question: 4%, 4.5%, 8%, 12%… You should do this, that, the other. Makes me tired….
I am just thankful that I still have a job that allows me to save. My investments will hopefully allow me and my wife to retire with some dignity and $$. You cannot foresee the future, you can only do your best to plan for it.Reply
- Bennyboy says
Okay, here’s another number. I retired at 49 and based my calculations on an average growth rate (capital growth plus income) of all of my investments of just 3%. Super conservative I know, and definitely a bit unrealistic but at least I can sleep soundly at night and it’s nice that most years exceed this e.g last year was over 15% 🙂
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- Jimcalf says
I used a 4% return for my retirement planning for years, as a hedge against low returns in the future as I became more conservative. The reality was around 8% over a 25 year period, with a 70/30 stocks bond mix. Thankfully, that allowed me to reach my goals much faster than planned. I now understand that I shouldn’t keep so much money in super conservative investments after retirement, just enough to ride out a 5 year slump to allow stocks to recover. I think they call that the bucket method. My lifetime planner still says 4% to keep me grounded, but my gut says I’ll keep getting 8% over time and either leave my kids a load of cash, or buy a yacht when I’m 80!
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- Dads Dollars Debts says
I have traditionally used 6%. Very conservative, true…but it gives me piece of mind. Either way, none of it matters until I am ready to pull the retirement lever. Until then I will hopefully watch my assets continue to grow.
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- George says
Agreed. 6% gives peace of mind. And most years you can see that happening which makes it feel more reasonable. For estimating I use 5%… I want a nice buffer when I retire.
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- Mike H says
Given the relatively high P/E levels compared to historic levels, I think we may be more in for a 6% rate of return as we can expect some forward P/E compression. My dividend yield rate is about 3.35% and I’d expect the stock prices to be bouncing around with the likelihood of trading sideways for a stretch. As a long term buyer of stocks, I’d like valuations to be lower.
-Mike
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- NR Properties says
Good article. I think 8 percent is a good number. Those that claim 10 to 12 percent in my opinion are talking about what the average investor can do. I mostly invest in Real Estate and the Stock Market. Lately I have been diversifying my RE investments by being a private lender but also growing my own private lender partners. I am able to payout an 8% return or better to most of my investors – term lengths vary. So 8% is a very doable rate even today.
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- Kevin says
I think 8% is perfectly fine. Luckily over the past 12 mo I am up 19%, but YTD only 10.83% on my investments. I carry a lot of cash right now and have for a while so my total return on total (incl cash) YTD is only 7.66% (but we have 4 months to go! :)) Last yr was 8.05% (and this is after tax). Forward view plans, which includes my cash returns (dividends), savings, etc, I use 7% after-tax for investment (stocks) returns (which equates closer to a 10% before tax) but this is for more realistic model for me. My overall portfolio including sizable cash plan for this year was 7.73% growth the way things all gyrated together. If I was doing a budget, I would be conservative on my investment returns b4 tax and be at 8%. Makes sense. I think everyone should have their own models of growth, savings, income based on their circ*mstances and what is the end purpose of that model – realistic (next yr or two) retirement or where I will be in 10 yrs (then you should be conservative). Not every year will be like last yr.
I have been upping my returns this year as I have been selling covered calls on some stocks and in many times buying them back very cheap and then selling again. Have done this on a number of stocks to the tune of $38k (15% of current yr total portfolio appreciation) on 14 diff stocks, but only 4 open at the moment. There are reasons as to why, what stocks, and what return I expect based on length, but that is not important here. The thing is 8% is a great starting point and very very reasonable for discussion purposes.
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- Coopersmith says
I agree that you can get these sorts of returns.
Maybe another point to bring up is people get emotional with there investing and buy and sell at the wrong times. Good news and bad news influences there time to buy and sell and it should not.
How many people have sold there stocks in fall of stocks in the Great Recession? Or stocks are up 10% now time to buy. No it is not. You are trying to time the market and you sold at the low and are buying high. Trading can hinder your wealth making ability when done too often.
I like Vanguards Wellesely income and Wellington funds are very well managed and conservative funds have yielded me 6.92% and 6.99% over ten years while my total Vanguard has earned me 8.9% total. I did this because I rarely sold but just kept investing.
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- Jeff B. says
I have always had cash to buy on large dips in the market. March 2008, January 2016, after Brexit and many other 500-800 point drops in a week or so. It has all bounced back.
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- Dave says
To reach our target date, we need to earn 6.5% on our investments. Our allocation is 65/35. Our time frame is 11 years. I am confident that my expectations are not unreasonable.
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- Brian Vroomen says
If you have ever looked up the statistics on the US economy and the government, its a scary picture. Mathematically speaking, you cannot have an economy that grows forever. When it stops, no one can tell, but it has to at some point. You cannot keep having 4% increases in GDP because at some point, people just can’t buy anymore, and sadly probably because they can’t borrow any more money to purchase things. What if we have another 2008/09 like (or worse) recession? What if we have another 10 year period with a net 0% return? I saw my investments drop and go back to break even 10 years later. You have an 11 year timeframe. What if this is the year that it drops again 50% but this time is different and it takes 20 years to recover?
I am just trying to be realistic. I am less than 10 years from age 65 and I was scared having money in the markets or bond funds. I knew rates were both low and if they were to rise, or rather whenever they did rise, my bond funds would drop in value while paying me a very low income. I moved 90% of my investments out of equity and bond funds. I then moved into alternate investments. I now have money in Private Mortgage Investment Corporations, Private REITs and some Private Hybrids. I also lend money out through a mortgage administrator. The REIT I am in never suffered a drop in 2008/09. The mortgage investment corporations are great because the average term to maturity is less than 1-2 years which means I will be getting the benefit of higher interest rates within 1-2 years. I don’t have to worry about the share prices dropping for an extended length of time like I would with the bond funds. I am earning about 7% on the Mortgage Investment Fund shares. I am earning about 7% plus 1-5% increase in share value in my private REITs. I also am earning 8.99% on 1st mortgages through the mortgage administrator. I sleep very well at night. I also have money invested in a fund that trades gold and S&P futures, with a track record of 100%/year on average. I am looking forward to a great crash. I stand to make a lot of money with no loss on my other investments.
Even with a small portion of my investments in shares and dividend stocks, they are making me nervous.
You need to open up your investment options beyond the standards that everyone blogs about. Stocks, bonds, etfs, index funds….I’m getting tired of reading the same thing over and over from people that have never gone beyond those basic investments.
I wish you luck with your target date expected returns.
Brian
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- Jason says
Personally, I think we will see 12-15% over the next 7-10 years. Once the secular bull market runs its course then we are in for over a 15 year or so period a market that will only gain 1-2% over the long-term. That can be both good and bad, but I do believe in the notion of secular bull and bear markets. Of course when it will end/begin is only an educational guess
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- Jeff B. says
Why would a market only gain 2% for 15 years? The market has never been that flat for an extended period of time. The market even going 4% a year, can be 100,000 in 20 years.
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- Brian Vroomen says
I agree with you Jason. I think you may even be too optimistic. If you are talking total returns over those time periods, not annualized returns.
If you have ever looked up the statistics on the US economy and the government, its a scary picture. Mathematically speaking, you cannot have an economy that grows forever. When it stops, no one can tell, but it has to at some point. You cannot keep having 4% increases in GDP because at some point, people just can’t buy anymore, and sadly probably because they can’t borrow any more money to purchase things. What if we have another 2008/09 like (or worse) recession? What if we have another 10 year period with a net 0% return? I saw my investments drop and go back to break even 10 years later.
What if this is the year that it drops again 50% but this time is different and it takes 20 years to recover?
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- Matthew says
I assume that everyone here is not accounting for inflation with the 8% return?
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- JeffB MI20 says
I can assume 11% with 3% inflation. It really doesn’t matter what you use as long as it is reasonable. Inflation doesn’t affect the retired as much if you aren’t moving or buying a new car every 3 years. Food costs go up and down as does gas, but many things are not impacted when you are retired IMO.
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- Simple Money Man says
I guess I’m a couple of years late commenting here. In my defense, I was diverted here through a link from a more recent post. Nevertheless to chime in, yes long-term the stock market has produced positive returns (8%-10%). And there have been many positive years rather than negative. So 8% is a very educated guess. You may even be able to beat 8% if you concentrate on growth stocks/funds early on in your investing career and rebalance into the S&P exclusively later.
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- Dan says
Based on valuation at the beginning of 2020, an average of 8% is likely too high of an estimate for the next 10 years.
This opinion was expressed in a one-hour Vanguard webinar on Jan. 9, 2020, interviewing Vanguard’s CEO and CIO. Vanguard’s opinion is that market valuations are currently “stretched” or slightly overvalued based on past valuations of furture earning flows, particularly in the U.S. Therefore, Vanguard’s modeling shows that its Total U.S. Market Index fund will return an average of approximately 5% over the next 10 years, and the Total International Index Fund will return an average of 7%.
Before anyone rushes into international stocks, both Vanguard execs (as well as Vanguard in general) emphasized that each investor needs to determine the appropriate balance of stocks, bonds, and cash in their portfolio based on each investor’s unique situation.
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- ESI says
Vanguard’s guess is as good as anyone’s, but in the end, no one knows for sure.
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- Dan says
Very true, of course. However, based on 10-year time horizons, I tend to trust Vanguard’s (seemingly) unbiased assessment more than purely historical averages. The point Vanguard’s execs made is that something very significant will have to occur to maintain the average equity market returns of 7% or greater, especially based on current U.S. market valuations. Either historically unusual corporate earning increases at a level never seen in U.S. history previously, or a willingness to pay a higher P/E ratio in purchasing the future income streams generated by publicly-traded companies, will have to occur to maintain a 7 – 8% return. Although either of those is possible in the short term, they are unlikely to continue over a 10-year time horizon. That was my only intended point.
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- ESI says
Do you know what they projected in 2010 for the next decade? That would be interesting to see…
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- Brian Vroomen says
In the “this time it is different” camp, in many if not all past recessions, if the government had not stepped in the recession would have lasted much longer. How was the damage mitigated? By dropping interest rates, typically in the range of about 5%. We are truly in a different position now because interest rates currently are below 2%. We can’t really go any lower without making rates negative. The market doesn’t know how to valuate stocks when rates are negative. The feds can’t increase rates given how much cheap debt is out there, both for consumers and corporations. Any blip up will be the beginning of the end and this time the fed cannot jump start the economy by reducing rates 5%. There is no more room to move. No one seems to take this into account in this current and I would say never before seen environment. It won’t take much to touch off a huge drop in stock prices. I’m just glad that I am positioned to make money in either direction the market decides to go, so I don’t really care. The majority of people though are stuck with “the market must go up” in order for them to make money.
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- Gary says
Currently I have invested money at close to 60/40 equity. And I currently assume 5% long term annual ROA and 3% annual inflation. I am planning to retire in months ahead and do some consulting then. I don’t know if one can get much return on bonds at all. I’d like to think my planning is conservative and I will do better.
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- JeffB MI20 says
Until Interest rates start to go up. bonds will have low interest rates. Unless you find some CCCC+ junk bonds……Nothing wrong with being conservative and having better returns. But 3% inflation is high.
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- MI-119 says
I own about 10 mutual funds at any given time, most of which have about 20-38% 10-year annualized returns at any given time…
They are concentrated in Technology, Internet, Healthcare and Consumer Discretionary.
…but they say you can’t beat indexing.
Of course a Van Gogh, Cezanne or DaVinci would have gotten you there too!
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- Brian Vroomen says
Would love to know which specific mutual funds you are in!
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- MI-119 says
Currently I own INPIX, FSRPX, FSMEX, FSPHX, DXQLX, FSELX, PMPIX are my largest holdings, about 85% of portfolio.
VFIAX is my S&P index holding. OPGIX has done okay for me but not as well as hoped until recently.
UGPIX has been the dud for me, but fortunately a smaller holding as I tend to get my feet wet first and accumulate more of the better sectors over time, as a strategy. Considering switching to MCSMX on the next big dip, as I do believe China will perform well in the medium to long term.
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- Brian Vroomen says
Thanks for sharing. Do you have any thoughts on how long these funds will continue to show such great returns? At some point everything has to return to the mean, though it looks like a nice mean! I still think of funds that had done phenominally well over long periods and then tanked and their average annualized returns ended up being very very poor, even though they too had excellent double digit annual returns for long periods. One good 10 year period does not mean the next 10 year period will be the same, though of course we always hope it will. The challenge for me would be the timing issues of the holdings, when to sell and then what to purchase to keep my returns up there. I appreciate your thoughts.
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- MI-119 says
That is a million dollar question.
I have absolutely no idea how long these sectors will maintain this performance. But I know they have generally been quite strong since the bull market started in early 2009. Going into 2007, oil and banking seemed to be the leadership. So I am not married to any sector if there is a suggestion it is falling out of favor. I’m constantly looking for evidence of new leadership, like small cap value if it finally starts to see momentum.
As JeffB notes below, the Nasdaq/tech bust can happen again. I suspect the only question is when, not if. So, while I try not to be over-reactive, my finger is always hovering over the sell button if I’m convinced a dotcom bust or a Great Recession/Depression is starting. I’ve been thru the dotcom bust, the Great Recession and now March 2020 and have thus far fared well. Admittedly, knowing when to sell is very difficult and requires regular, close attention to the economy and market.
A few points, I am several fold FI with a 7 figure income so I may have a bit more risk tolerance. Also, my market investments only account for about 18% of my investment portfolio, which includes RE and personal business. I also want to deploy another few million over 5 years if we see another dotcom bust or Great Recession, so I see those as big opportunities. What I do is probably not for most, aiming for more than 8% long term.
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- JeffB MI20 says
Seems a bit concentrated in the Tech Sector IMO. 1999-2000 could hit again, but hey, ride it out…..
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- MI-119 says
will hit again…
all I (we) can do is have a plan for the different scenarios. Plan to optimize returns has been good for me. Plan to minimize losses, we’ll see. Maybe I’ll learn a big lesson.
Generally tech, healthcare, consumer staples, China, gold. Really wasn’t interested in energy, banking, consumer staples, value over the past decade. That can change, but so far they have been the drag on the indexes.
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- Brian Vroomen says
Would love to know which specific mutual funds you are in!
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