A good average return on investment (ROI) is often considered 10.5% or greater when discussing stock market investments.
Understanding "Good" ROI
The term "good" return on investment can be subjective and vary depending on the type of investment, your risk tolerance, and your financial goals. However, within the context of the U.S. stock market, a widely accepted benchmark exists.
According to professionals, a return of 10.5% or higher is considered a good ROI for investments in stocks. This figure is often used as a standard because it represents the average historical return of the S&P 500.
Why the S&P 500?
The S&P 500 is a stock market index that tracks the performance of 500 of the largest publicly traded companies in the United States. It is often used as a benchmark to gauge the overall health and performance of the U.S. stock market.
Investing in a fund that tracks the S&P 500 is a common strategy for investors seeking broad market exposure. Therefore, achieving a return comparable to or exceeding the S&P 500's average is generally seen as successful.
Context Matters
While 10.5% is a benchmark for stocks, what constitutes a "good" return differs across asset classes:
- Real Estate: Returns can vary significantly based on location, property type, rental income, and appreciation.
- Bonds: Typically offer lower potential returns than stocks but are generally considered less volatile.
- Savings Accounts/CDs: Offer very low returns but high safety and liquidity.
Here's a simplified view comparing potential returns (note: these are general examples and not guarantees):
| Asset Class | Typical Potential Return Range | Risk Level |
|---|---|---|
| Stocks (S&P 500) | ~10.5%+ (Historically) | Medium-High |
| Real Estate | Varies widely | Medium |
| Bonds | Lower than stocks | Low-Medium |
| Savings Accounts | Very Low (<1%) | Very Low |
Achieving and Evaluating ROI
- Diversification: Spreading investments across different asset classes can help manage risk and potentially improve overall returns.
- Long-Term Perspective: Stock market returns are subject to volatility. The 10.5% average is based on historical long-term performance. Short-term returns can be much higher or lower.
- Consider Fees: Investment fees can impact your net return. Always factor these in when evaluating performance.
- Compare to Benchmarks: Evaluate your portfolio's performance against relevant benchmarks (like the S&P 500 for U.S. large-cap stocks) to understand how it's performing relative to the broader market.
Ultimately, a "good" return is one that helps you meet your specific financial goals within your acceptable risk level. However, as a general guideline for stock market investments, 10.5% or greater is often cited as a strong benchmark due to its historical alignment with the S&P 500's average performance.
