Is 10% a realistic investment return rate?


A couple of weeks ago, I did a presentation at EY, a company I used to work for in New York and which provides advisory, assurance, tax, and transaction services around the world.

As I finished talking, several women came to me with more specific questions about investing.

One of them, Marie, did not have a question. Instead, she came to me saying:

“You showcase examples that use an investment return rate of 8% to 10%. My boyfriend works in finance, and he told me that this was totally unrealistic.

I responded that I chose these rates based on historical returns of the S&P 500.

Still, Marie was not convinced: Is it realistic to expect that going forward?

Marie’s remarks resonated with me.

I knew that the historical performance of the S&P 500, which represents the 500 largest listed companies in the US, has had a consistent average annual return of 9-10% for the last 100 years.

But is it realistic to use it to project the performance of our investment portfolio?

I decided to dive in and figure it out.

How do you calculate the investment return rate?

First things first: let’s look at what we mean by a rate of return on investment.

The rate of return is the percentage increase or decrease over your initial investment. It basically tells you what you have earned or lost on the investment you made.

Here is the investment return rate formula that you would use:

Rate of Return = (Current Value of Investment - Initial Value of Investment) x 100%  / Initial Value of Investment

Let’s look at an example:

Let’s say you invest USD 1,000 in an ETF that tracks socially responsible companies included in the MSCI World Index; the iShares MSCI World ESG Screened UCITS ETF, for example.

One year later, you see that your investment now has a value of USD 1,100.

Here is what you would do:

1. Subtract current value from initial investment:

$1,100 - $1,000 = $100

2. Divide difference by the absolute value of original investment:

$100 / $1,000 = 0.1 (= quotient)

3. Multiply the quotient by 100% to turn it into a percentage:

0.1 x 100% = 10% Rate of Return

This was a quick and easy example so that you can understand how the formula works. For more info on this, you could also check out this article from The Street by Michelle Rama-Poccia.

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Investment returns in history

Now that we have covered the mechanics, let’s look at what would be a realistic average rate of return.

We can’t read the future, unfortunately!

Because I can’t read the future, the best we can do is look at how the stock market has performed over the last century.

Now, if like me, you have a background in finance and investments, you already know the fine print which goes at the bottom of the page every time we give historical return information:

“Past performance is not a guarantee or indicator of future results.”

And that’s very true.

Having said that, average historical performance over a long period is still one of the best ways we have (though far from perfect) to get an idea of how much we can expect from that investment in the future.

This is why the best way to get a feel of what to expect when investing in the stock market is to consider how it has performed in history.

Returns of stocks over the last 80 years

As a proxy for the stock market return, I like to use the S&P 500 index, which, as I said earlier, represents the 500 largest publicly-traded companies in the US.

I like to look at the S&P 500 because it has been around for quite a while, which means that we can get historical performance for this index for 100 years or more.

Also, the US stock market represents some 40% of the worldwide stock market capital size, which makes it a relatively good representative of the stock market in general.

In the chart below, you can see the evolution of the S&P 500 index over the last 100 years, assuming you had re-invested dividends each time.

I know… that’s quite a chart!

And though it looks like the last few decades have just been crazy. This is not the case. If you run the chart for an earlier (or somewhat shorter) period, it would look more or less the same.

If you had reinvested dividends each time, your USD 1,000 invested at the beginning of 1936 would have transformed into a massive fortune of nearly USD 55 million at the end of 2018.

This translates into an average investment return rate of 10.5% each year.

What if I had invested for the last 30 years?

Now, to get to a comparable astronomical amount, we would need to invest for 80 years or so.

Clearly, that’s quite unlikely to happen!

But assuming you are in your thirties or forties you can (and definitely should!) invest at least for the next 20-30 years until you retire and even beyond that.

So let’s look at what the return would have been like if someone had invested for the last 30 years.

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A balanced portfolio

While we could certainly have invested all our money in the S&P 500, it is more common (and recommended) to diversify investments and create a balanced portfolio.

The way to do that in its purest form would have been to invest a portion of my money in bonds.

Bonds are a loan that an investor grants to a government or a company. In return, the investor earns interest for this loan, while the actual value of the investment remains relatively stable.

A typical long-term portfolio could look like this:

  • 80% invested in shares (--> using the S&P 500 as a proxy)

  • 20% invested in bonds (--> using the US 10-year treasury bills as a proxy)

Just one more note about this.

If we only invest in shares, then after 30 years, we would very likely have ended up with a bit more money than if we also include bonds in our portfolio.

Having said that, balancing the portfolio with both shares and bonds has the advantage of smoothing returns.

This means that if the stock market crashes by 20% in one year, the value of our portfolio will decrease by less than that because it's bond component would remain relatively stable in value.

The same applies when the stock market goes up by 20%. In this case, the overall portfolio performance would be less than 20%.

And this is good because it helps us keep our heart rate a little more stable during market crashes!

There are also studies that show that over time, if you invest in different types of assets in the right proportions (e.g., shares, bonds, real estate, metals, etc.), the diversification plays in your favor and actually increases your returns, rather than decrease them.

But for now, let’s stick to our simple 80/20 portfolio ;-)

Actual non-adjusted returns

So let’s assume that, 30 years ago, you had started saving USD 1,000 each month and invested all of that in my 80/20 portfolio.

Here is what would have happened:

Basically, if you had also re-invested the dividends each year, you would have cashed in USD 1.7 million on 31 December 2018!

All of that because you would have enjoyed an average rate of return of 10.0%.

Not bad!

And pretty much on par with the rates I have been using for my simulations in the past.

In contrast, if you had only saved your money, that is USD 1,000 each month from the beginning of 1990 to the end of 2018, you would have ended up with only USD 360,000 at the end of 2018.

What else should we take into consideration?

Now, there are a few adjustments we need to make to apply historical performance to our specific situation.

Adjusting for taxes

When we invest, we also, UNFORTUNATELY, need to take into account the taxes we have to pay on our investments.

In Switzerland, I pay taxes on the income that my investments generate. And very fortunately, I do not pay any taxes on the increase in the value of my stock market investments, unlike in many other countries.

That means that if I invest in the S&P 500, I have to pay taxes each year on the dividends I earned, even if these dividends are automatically reinvested by the ETF.

Similarly, I have to pay tax on the interest income generated by my investments in bonds.

The overall tax rate anyone pays is dependent on many factors, including how much you earn in total (dividends + interests + salary), in which country, state/canton, and city you live, how many children you have, whether or not you are married, etc.

For our analysis here, let’s consider a tax rate of 25%.

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Adjusting for inflation

I also need to take inflation into consideration.

Inflation refers to the general increase in prices of goods and services over time and the corresponding fall in the purchasing power of money.

For example, if you had USD 1,000 in your wallet 30 years ago, you would be able to buy a lot more for your money than with the same USD 1,000 today.

The average inflation rate over the last 30 years for Switzerland, where I live, is 1.2%.

Adjusting for fees

And importantly, we need to deduct the fees for investing.

Because like everything else in life, investing in the stock market is not free.

And one of the best ways to maximize investment performance is to keep the fees of investing low. I go at length about fees on the following blog post: “I hate fees, and so should you.


ETF Fees

First of all, we can’t invest in the S&P 500 directly. Instead, we would need to invest in an ETF (“Exchange Traded Funds”) that invest in the same companies in similar proportions as the S&P500.  

Similarly, the best way to get exposure to US treasury bills is to invest in an ETF that invests in a basket of US treasury bonds.  

To find suitable ETFs, I went on a website I really like: is an online platform for do-it-yourself portfolio management. It has a comprehensive list of ETFs and let you select them based on a set of criteria.

So I search for ETFs using the following criteria:

  • Listed on the Swiss stock exchange

  • CHF-denominated

  • Accumulating (=automatically re-investing dividends)

For the S&P 500, the cheapest ETF I found matching these criteria is the iShares S&P 500 CHF Hedged UCITS ETF (Acc), which has an annual fee (=total expense ratio) of 0.20%.

Unfortunately, I could not find an ETF investing in US 10y treasury bills in CHF. As a replacement, let’s consider the USD denominated SPDR Barclays 10+ Year US Treasury Bond UCITS ETF, which has a total expense ratio of 0.15%.

Considering our 80/20 portfolio allocation, the combined ETF fee to be deducted from our annual investment return rate is 0.19%.

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Transaction and Asset Management Fees

Now, we have two good ways to invest in ETFs.

First, we could open an account with an online robo advisor, which would charge us some kind of annual asset management fee. The cheapest robo advisors in a place like Switzerlandwill charge you a yearly fee of 0.50%.

(Note: Online robo advisors did not exist 30 years ago… but let’s imagine they did so that we can use this info for investing in an online robo advisor going forward)

Now, of course, these two online robo advisors would build a portfolio of ETF for you that is not exclusively based on the S&P 500 and the 10-year treasury bill.

Nevertheless, their fee is a good indicator of what it would cost to have an online robo advisor invest in a balanced portfolio for you.

Second, we could invest directly in ETFs by opening an account on an online trading platform, Interactive Brokers, for example.

This way, we would only pay a fee every time we invest money, but we would not have to pay an additional annual management fee.

Ideally, we should keep transaction costs to 1% of the amount invested or less. Investing CHF 1,000 in the Swiss stock exchange with Interactive Brokers would typically cost CHF 10, which is precisely 1% ;-)

Adjusting for currency

Here is something which might come as a surprise if you are reading this article from Florida or the likes:

The USD is not the only currency out there! And not all of us have their income in US dollars.

And if like me at this time, your income is not in USD, then you need to account for exchange rates when considering the historical return of the S&P 500 and the US treasury bills.

This is because these historical returns assume that you save and invest US dollars and then cash in US dollars at the end of the investment period (=i.e. when you retire).

So, where does this lead us?

With the help of one of my over-the-top-smart-and-beyond-intelligent professional investor friends from the Netherlands, I was able to run some calculations and come to helpful conclusions.

If I had invested CHF 1,000 every month for the last 30 years using an online robo advisor such as Swiss-based Simplewealth, I would have cashed out on no less than CHF 0.9 million as a Christmas present to myself at the end of 2018.

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And if I had only saved that money, rather than investing it, I would just have invested a radically less impressive CHF 360,000 pot in my savings account.

And all of that translates into an average real return rate of 6.6%. This accounts for tax, inflation, currency, and fees. If we take out inflation, we are at 5.3%.

This is the rate a Swiss resident like me should use when calculating how much I will have from my investments when I retire.

US folks are a little better off! They would have ended up with USD 1.4 million, which translates into an annual rate of return of 8.3% (5.7% when accounting for inflation).

One more comment on this.

Once you start investing and look at your actual rates of return over the years, you want to benchmark against the return rate that is not adjusted for inflation.

And when you want to calculate how much your investments will bring you in the future, then you should use the return rate that is adjusted for inflation.

Is this a realistic investment return rate going forward?

And now you might be thinking: “ok, Aysha, this was for the last 30 years; what guarantee do I have it will happen again in the next 30 years?”

To which I can only answer:

There is no guarantee.

This time is different

Having said that, several economists and professors have studied the stock market in detail, going over more than a century of stock market performance.

There are even a couple of excellent books on this very topic.

One such famous book, as brought to my attention again by my friend Martijn, is: “This Time is Different: Eight Centuries of Financial Folly” by Carmen Reinhart and Kenneth Rogoff.

‘This Time Is Different’ is a remarkable 500-page book that reviews the performance of the stock market and analyses the circumstances of market crashes and rises over more than a century.

And one of the main take-aways is that economists, central bankers, and investors alike are prone to what we can call is the “this-time-is-different syndrome.”

This means that we always tend to believe that the current circumstances are different than in the past.

This could be due to technology advancements, political shifts, and more.

Yet, it seems that the cyclical nature of the stock market has been relatively consistent over time.

And reviewing the past performance of the stock market shows that history tends to repeat itself.

Is this applicable to my situation?

The investment simulation we reviewed above is a simple indicator of how investing for the last 30 years could have looked like for me.

But of course, many things will be different as you draw comparisons to your own situation.

For example:

  • You will likely be able to save and invest different amounts throughout your life (rather than a steady CHF 1,000 per month every year)

  • You will probably have a different portfolio allocation, possibly with more asset classes than shares and bonds.

  • You could very well invest in something other than the S&P 500 and the US 10y Treasury bills

  • You may live in a different country with a different inflation rate and currency

  • etc.

For sure, the example above is not the absolute universal truth.

Having said that, it is a good indicator of what return you should expect when you invest the right way over the long term.

Final note

So, is an investment return rate of 8-10% a realistic?

Well, as per the calculations above, 8% before inflation is realistic if you are a US investor. But not if you are a Swiss investor.

Let’s sum it up this way:

  • When you look at your actual portfolio performance as the years go by (=not inflation-adjusted), then 6.6%-8.4% is a realistic rate of return

  • When you calculate how much you will have when you continue investing for the long run, then you can use an inflation-adjusted average annual return rate of approx. 5.5%.

That’s it for this time.

And in case you have not done so, JUST-GET-STARTED!





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