{"id":570,"date":"2021-01-18T12:00:00","date_gmt":"2021-01-18T12:00:00","guid":{"rendered":"https:\/\/moneywithkatie.com\/where-the-7-percent-return-comes-from-in-investing\/"},"modified":"2025-08-29T20:23:52","modified_gmt":"2025-08-29T20:23:52","slug":"where-the-7-percent-return-comes-from-in-investing","status":"publish","type":"post","link":"https:\/\/moneywithkatie.com\/where-the-7-percent-return-comes-from-in-investing\/","title":{"rendered":"Where to Invest for an Average 7% Return in 2025"},"content":{"rendered":"
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For some reason when I thought about compound interest, the first thing my brain went to was, \u201cmountains.\u201d Ugh. I don\u2019t know.<\/p><\/div>\n

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The focus of this blog shifts in accordance with my own obsessions, so you\u2019ve probably noticed a focus on investing recently (before that it was psychological approaches to changing your spending habits, then it was travel rewards, and now\u2026 here we are). <\/p>\n

I like to think that, as a result of my frenetic obsession-switching, you\u2019re<\/em> going to get a pretty damn well-rounded free InTeRnEt EdUcAtIoN. What more could you ask for? #ReferAFriend<\/p>\n

Back to basics<\/h4>\n

One question I started to get more when I\u2019d post about investing surprised me: \u201cWhat do I have to invest in to get the 7% return?\u201d<\/em><\/p>\n

I realized: I had failed y\u2019all on hitting the basics first before diving into a veritable deep-end of early retirement drawdown strategies.<\/p>\n

Blame me, not yourselves \u2013 let\u2019s talk about why I always use 7% in my examples.<\/p>\n

When I first sat down to write this post, I figured I\u2019d find 1,000,000 pages of Google search results with proof for the average \u2013 but I was surprised to find the search results were a little bit more all over the place than I expected, and most of the articles quoted some Warren Buffett Bloomberg article that I was unable to actually find (you know how it is \u2013 one article links the quote to another, which linked to a different secondary source, which linked to the first blog I found\u2026 it\u2019s a circular cluster, and while I\u2019m sure the quote is legitimate, I couldn\u2019t find the original Bloomberg piece that these blogs allege originally published the interview, so I\u2019m hesitant to include it here).<\/p>\n

In any case, Buffett\u2019s interview quote mostly just offered an explanation for why<\/em> the average return is 7% (it has to do with GDP, inflation, and dividends, basically).<\/p>\n

Moral of the story? It sounds like this is more contested and discussed in the finance community than I originally thought.<\/p>\n

In short, the average stock market return since the S&P 500\u2019s inception in 1926 through 2018 is approximately 10-11%. <\/h4>\n

When adjusted for inflation, it\u2019s closer to about 7%<\/strong>. [Since we\u2019re talking citations in this post: <\/em>Investopedia<\/em><\/a>.]<\/em><\/p>\n

The S&P 500 today<\/em> is composed of the 503 largest companies listed on stock exchanges in the U.S., and it\u2019s responsible for driving most of the growth in the total market. <\/p>\n

1926 was 100 years ago, and a lot has happened in the last century \u2013 if we shorten our look-back period to \u201crecent\u201d history, so to speak, I love this excerpt from Investopedia<\/a> that regales us with tales of bull markets, bear markets, and \u201cblack swans\u201d: <\/p>\n

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\u201cThe most recent 20-year span, from 2000 to 2020, not only included three bull markets and two bear markets, but it also experienced a couple of major black swans with the terrorist attacks in 2001 and the financial crisis in 2008<\/span><\/a>. There were also a couple of outbreaks of war on top of widespread geopolitical strife, yet the S&P 500 still managed to generate a return of 8.2% with reinvested dividends<\/span><\/a>. Adjusted for inflation, the return was 5.9%, which would have grown a $10,000 investment into $31,200.\u201d<\/p>\n<\/blockquote>\n

Notice anything hilarious about this paragraph? Any major black swans missing? Perhaps a black swan that\u2019s lost its sense of taste and smell? As you can see, we had three of them in 20 years, and the market\u2019s still doing great. My perception of this? The market is resilient.<\/p>\n

That\u2019s about 6% from 2000 to 2020. <\/p>\n

\u201cYou could repeat that exercise over and over to try to find a hypothetical scenario you expect to play out over the next 20 years, or you could simply apply the broader assumption of an average annual return since the stock market\u2019s inception, which is 6.86% on an inflation-adjusted basis<\/strong>. With that, you could expect your $10,000 investment to grow to $34,000 in 20 years.\u201d<\/p>\n

What does this mean for you?<\/h4>\n

Whether we\u2019re talking a 5.9% return or the 12.97% return<\/a> we\u2019ve seen over the last 10 years, investing in the S&P 500 is all but USDA-choice, FDA-insured to beat your savings account by a landslide. <\/p>\n

To invest in the S&P 500, you have options. <\/p>\n

You can either buy index funds (that have slightly higher fees, as a general rule, and are priced once per day \u2014 index funds usually require a higher \u201cbuy-in\u201d as well) or you can buy ETFs (which are made up of the exact same thing but traded throughout the day like a stock and usually have lower fees). <\/p>\n

Got it? Two options. Index funds and ETFs.<\/p>\n

Because I am a Vanguard loyalist, I invest in Vanguard index funds and ETFs:<\/p>\n

VOO<\/strong> is the ticker symbol for the Vanguard S&P 500 ETF. <\/p>\n

VFINX<\/strong> is the ticker symbol for the Vanguard 500 Index Fund Investor Shares. <\/p>\n

They\u2019re basically exactly the same, except for the way they trade. <\/p>\n

All major investment banks have their own version of this, and at its most basic level, the index fund\/ETF has a little piece of each company in the S&P 500. For a list of these companies, check out this article<\/a>. Think Alphabet (Google). Amazon. American Express. Southwest Airlines! Domino\u2019s Pizza! These are big names, and instead of hitching your wagon to one, you get to buy a little of all 500 when you invest in S&P 500 index funds and ETFs.<\/p>\n

Other banks offer a similar investment \u201cproduct,\u201d and I did a little poking around. <\/p>\n