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Return on Investment: The 12% Reality

When it comes to investing, you’ve probably heard the phrase “12% return on investment.” And while it sounds like a pretty good deal, can you really get a 12% return on mutual fund investments, even in today’s market?

Yup. Sure can.

But before we go there, let’s cover some of the basics about the average mutual fund return that you need to know first.

Where Does the Idea of a 12% Average Mutual Fund Return on Investment Come From?

When Dave Ramsey says you can expect to make a 12% return on your investments, he’s using a real number that’s based on the historical average annual return of the S&P 500.

The what? The S&P 500. It looks at the performance of the stocks from the 500 largest, most stable companies in the New York Stock Exchange—it’s pretty much thought of as the most accurate measure of the stock market. 

The current average annual return from 1928 through 2020 is 11.64%.1 That’s a long look back, and most people aren’t interested in what happened in the market 90 years ago.

So let’s look at some numbers that are closer to home over a 30-year span:

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1990 to 2020: S&P’s average was 11.55%.

1985 to 2015: S&P’s average was 12.36%.

1980 to 2010: S&P’s average was 12.71%2

Now remember, that’s spread out over 30 years. When you look at the year-to-year returns, things don’t look so pretty. In 2015, the market’s annual return was only 1.38%, but in 2013, it was 32.15%. Heck, even as crazy as 2020 was, the average rate of return ended up at 18.01%.3 So when you’re looking over the averages, expect to have one-off bad years (and even great ones!). What you really care about is how it’s performing over the span of many years.

And based on the history of the market, 12% is not some magic, unreal number. It’s actually a pretty reasonable bet for your long-term investments.

But What About the “Lost Decade”?

Until 2008, every 10-year period in the S&P 500’s history has had overall positive returns. But from 2000 to 2009, the market saw a major terrorist attack and a recession. And yep—you guessed it, the S&P 500 reflected those tough times with an average annual return of 1% and a period of negative returns after that, leading the media to call it the “lost decade.”4

But that’s only part of the picture. In the 10-year period right before that (1990–1999) the S&P averaged 19%.5 Put the two decades together and you get a respectable 10% average annual return. That’s why it’s so important to have a long-term view about investing instead of looking at the average return each year.

But that’s the past, right? You want to know what to expect in the future. In investing, we can only base our expectations on how the market has behaved in the past. And the past shows us that each 10-year period of low returns has been followed by a 10-year period of excellent returns, ranging from 13% to 18%! 

How to Invest in Mutual Funds

When you’re ready to invest (meaning you’re on Baby Step 4), make sure you’re investing 15% of your gross income. If your company offers a 401(k)—sign up for it. And if they offer a match—take it! That will help kick-start your investing goals in no time. When you start looking at mutual funds, be sure to diversify your investments. We recommend splitting it all up equally in four categories, like this:

  • Growth
  • Growth and income
  • Aggressive growth
  • International

So do your research and look for mutual funds that average or exceed 12% long-term growth—it’s not hard to find a good number of them to pick from, even in today’s market.

We know all the numbers, percentages and weird terms can make investing seem really complicated, but stick with us here. Taking your time to learn how to invest is worth it. And it’s going to pay off in the long run. And you don’t have to walk it all on your own. An investing professional can help you find the right mix of mutual funds.

If You’re on the Fence About Investing . . .

Will your investments make as much as the average mutual fund return? Maybe. Maybe more. But the idea is that you invest for the long haul. Following Dave’s investing philosophy has inspired tens of thousands of Americans to start investing in order to reach their long-term financial goals. 

Don’t let your opinion about whether or not you think a 12% average mutual fund return is possible keep you from investing. Look at the facts, gather up all the numbers, and then make your decision based on that kind of information.

Why You Need an Investing Pro

The stock market will have its ups and downs, and the downs are scary times for investors. They make knee-jerk reactions by pulling their money out of their investments. That’s exactly what millions of investors did as the market plunged back in 2008 and during the COVID-19 global pandemic of 2020. But guess what. Those people who jumped off the investing roller coaster only made their losses permanent. If they’d stuck with their investments like we teach, their value would have risen along with the stock market as the years went on. Tough luck for them—they didn’t get to reap the benefits as the market recovered.

This is just another reason you need an investment pro on your side—they can help you keep your cool in crazy times and focus on the long term.

In fact, upping your investments during down markets can actually help drive the big-time total return on investments in your portfolio. It’s important not to be scared by the short term (or try to time the market and chase performance spikes). Remember, investing is a marathon—it takes endurance, patience and willpower, but it will pay off in the end.

Bring up your investing concerns and goals with an investment professional in your area today!


Ramsey Solutions

About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners.

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