Most investors looking to build wealth invest in mutual funds or exchange-traded funds (ETFs). These funds provide a convenient way to purchase hundreds or thousands of shares of stock, real estate investments, or bonds. While returns can vary dramatically across a single year or two, the most important question for investors is: What is the long-term average annual return of stocks, real estate, and bonds?
Good Average Annual Return for a Mutual Fund
A good average annual return for a mutual fund or ETF depends on two primary factors — the type of fund and the historical time frame you are reviewing. When researching funds, it’s wise to review long-term returns, such as the 10-year annualized return, to get a reasonable expectation of future performance.
For stock mutual funds, a “good” long-term return (annualized, for 10 years or more) is 8%-10%. For bond mutual funds, a good long-term return would be 3% to 5%. For real estate investment, a good long-term return would be 9-11%. For more precise, “apples to apples” comparisons, use a good online fund screener. You can then compare any given return for a mutual fund or ETF with its category average or against a benchmark index.
Compare to a Benchmark
One measure of what determines good long-term performance is when a fund comes close to meeting its benchmark index for 10 years or more. Most funds cannot match their benchmark since benchmarks do not include fees, but fund managers have expenses to pay. Popular benchmarks include the Standard and Poor’s 500 Index for large company US Stocks and the Bloomberg Barclay’s Aggregate Bond Index. The ‘Agg’ represents the U.S. investment-grade bond market including corporate bonds, municipal bonds, mortgage-backed securities, and Treasuries.
Fund Examples
Let’s take a look at examples of specific ETF funds and compare the annualized return across multiple years. These returns are accurate as of 10/31/2021 (Morningstar).
iShares Core S&P 500 Index ETF (IVV) has given an annualized return of 9.71% during the past 20 years. This ETF seeks to track the investment results of an index composed of large-capitalization U.S. equities.
iShares Core Aggregate Bond ETF (AGG) has given an annualized return of 4.01% during the past 15 years. This ETF seeks to track the investment results of an index composed of the total U.S. investment-grade bond market.
Vanguard Real Estate ETF (VNQ) has given an average annual return of 10.93% during the past 20 years. This ETF tracks the universe of large, mid-size, and small U.S. companies within the real estate sector.
You can see how stock returns in the S&P 500 or real estate returns can produce higher returns for your portfolio than more conservative investment-grade bonds. These higher returns can support your wealth building and help overcome rising inflation. More conservative bonds balance out the higher risk and return of stocks and real estate funds. Bonds might be used for your medium-term (3-8 year) spending needs in retirement.
Create Your Portfolio
In addition to large US stocks, real estate, and bond funds, there are many categories of funds to choose from including small and mid-sized company stocks, international stocks, high yield more risky bonds, international bonds, and master limited partnerships to name a few. The weight or proportion of each fund type will ultimately determine the long-term return of your portfolio. And, the mix of funds will determine the daily fluctuation of your investment value.
It’s important to create a mix of funds that achieves your long-term goals and meets your return need such as supporting your safe withdrawal rate during retirement. However, you want to make sure the amount of risk you are taking allows you to sleep comfortably and not have too much anxiety when the stock market craters 40% during the next global pandemic.
Final thought.
Have you selected the right mutual funds to meet your investing goals? If you have a net worth over $2 million and need help from a wealth manager, the Peak Wealth Planning team can assist you.
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About the Author
Peter Newman is a Chartered Financial Advisor (CFA) and president of Peak Wealth Planning. He works with individuals nationwide that have accumulated wealth through company stock, ESOP shares, real estate, or running a business. Peter applies his unique background to help clients achieve their specific goals and enjoy peace of mind.
Peak Wealth Planning offers personalized concierge services to meet your wealth management needs, including financial planning, investment management, ESOP diversification, retirement income, insurance, and estate planning. As a fee-based financial advisor based in Chicago, Peak Wealth Planning serves a select group of clients in Illinois and across other states.