Nominal vs Real Returns
10% sounds great — but inflation eats about 3% per year:
| Nominal | Real (After 3% Inflation) | |
|---|---|---|
| Average annual return (1928-2025) | 10.2% | 7.0% |
| Best year (1954) | +52.6% | +53.4% |
| Worst year (1931) | -43.3% | -33.8% |
| Negative years | 26 out of 98 (27%) | 32 out of 98 (33%) |
The Roller Coaster: Best and Worst Years
| Best Years | Return | Worst Years | Return |
|---|---|---|---|
| 1954 | +52.6% | 1931 | -43.3% |
| 1933 | +53.9% | 2008 | -37.0% |
| 1995 | +37.6% | 1974 | -26.5% |
| 2013 | +32.4% | 2002 | -22.1% |
| 2024 | +25.0% | 2022 | -18.1% |
The market averages 10% but almost never returns exactly 10%. Annual returns cluster in three ranges: big gains, moderate gains, or losses. Planning tools that assume a smooth 10% every year are dangerously unrealistic.
Rolling Periods: The Power of Staying Invested
Over longer holding periods, the range of outcomes narrows dramatically:
| Holding Period | Best Annualized Return | Worst Annualized Return | % of Periods Positive |
|---|---|---|---|
| 1 year | +53.9% | -43.3% | 73% |
| 5 years | +28.6% | -12.5% | 87% |
| 10 years | +20.1% | -1.4% | 95% |
| 20 years | +17.9% | +3.1% | 100% |
| 30 years | +14.9% | +8.5% | 100% |
Over 20-year rolling periods since 1928, the S&P 500 has never lost money. Not during the Great Depression, not during the 1970s stagflation, not during 2008. The worst 20-year period still returned 3.1% annualized — above inflation.
What Return Should You Use in Planning?
| Time Horizon | Conservative | Moderate | Aggressive |
|---|---|---|---|
| 10 years | 6% | 8% | 10% |
| 20 years | 7% | 9% | 11% |
| 30+ years | 8% | 10% | 12% |
Always plan conservatively. If you hit your goals at 7% projected returns, actual 10% returns are a bonus. If you plan at 12% and get 7%, you're short. Use 7-8% real returns as your baseline for equity-heavy portfolios over 20+ years.
Key Takeaways
- S&P 500: 10.2% nominal, 7% real since 1928
- 1 in 4 years is negative — expect and accept it
- Over 20-year periods, stocks have never lost money
- Plan using 7-8% real returns — conservative baseline, not best guess