Why Do We Use 12% in Our Investing Examples?

Twelve percent—whether you first heard Dave mention it in Financial Peace University or you read it on daveramsey.com, it was undoubtedly followed by questions.

But most of those questions boil down to two important ones: “Can I really get a 12% return on my mutual fund investments, even in today’s market?” and “If I can, which mutual funds should I choose?”

Where Does It Come From?

When Dave says you can expect to make 12% on your investments, he’s using a real number that’s based on the historical average annual return of the S&P 500. The S&P 500 gauges the performance of the stocks of the 500 largest, most stable companies in the Stock Exchange. It is often considered the most accurate measure of the stock market as a whole. The current average annual return from 1926, the year of the S&P’s inception, is 11.69%. That’s a long look back, and most people aren’t interested in what happened in the market 80 years ago.

So let’s look at some numbers that are closer to home. The S&P’s average annual growth was 9.07% over the last 20 years. For the last 25 years, it’s 10.05%. In 2009, the market’s annual return was 26.46%. In 2010, it was 8%. In 2011, it was -1.12%.

So you can see, 12% is not a magic number. But based on the history of the market, it’s a reasonable expectation for your long-term investments. It’s simply a part of the conversation about investing.

But What About the ‘Lost Decade’?

Over the years, Dave has often pointed out that every 10-year period in the market’s history has made money, and that was true until the financial mess hit in 2008. From 2000–2009, the market endured a major terrorist attack, a couple of wars and a recession. 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.”

But that is only part of the picture. In the 10-year period right before that, 1990–1999, the S&P averaged 19% annually. Put the two decades together, and you get a respectable 10% average annual return.

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%!

If You’re Still Unsure…

Will your investments make that much? Maybe. Maybe more. But the idea here is that you actually invest, and you invest for the long haul. Don’t let your opinion about whether or not a 12% return is possible keep you from investing.

In fact, if you’d rather project your mutual funds to grow at 10% or 8%—that’s cool with us. Just set a goal and invest whatever you need to in order to meet that goal.

How to Find Your Funds

It’s not difficult to find several mutual funds that average or exceed 12% long-term growth, even in today’s market. An experienced investing professional can help you find good mutual funds in each of the four categories Dave recommends.

But the value of an investing professional doesn’t end there. The stock market will have its ups and downs, and the downs are scary times for investors. They react by pulling their money out of their investments—that’s exactly what millions of investors did as the market plunged in 2008. But that only made their losses permanent. If they’d stuck with their investments like Dave suggests, their value would have risen along with the stock market over the next few years.

An investing professional will keep you from making that mistake and show you how the down times can actually make you money. Our SmartVestor Pros understand long-term investing and will help keep you accountable. Talk with a SmartVestor Pro today and discuss your investing concerns and goals.