What Is a Good Rate of Return on Investments?

The #1 Mistake With a Good Rate of Return on Investments

Most people treat the long-run stock-market average – roughly 10% nominal or 7% after inflation – as the score they should hit every year. That’s the trap.

That number is a multi-decade compound average across booms, crashes, and recoveries. In any single year the market is rarely “average.” Demand it annually and you’ll either take reckless risk or feel like a failure in normal down years. Worse, it ignores inflation, fees, taxes, your actual mix of stocks and bonds, and when the bad years arrive.

If your mental benchmark is “I need 10% or I’m behind,” you’re already measuring the wrong thing.

Why Most “Good Return” Guides Fall Short

Typical articles list asset-class averages, show a simple ROI formula, and stop. They rarely force you to answer: good for what? A 25-year-old saving for retirement can accept stock volatility that would wreck a 65-year-old drawing income. A 5% real return that funds your specific goal beats a flashy 15% you abandon after a 30% drawdown.

Investor returns and fund returns aren’t the same thing. Over the 10 years ended December 31, 2025, the average dollar in US funds and ETFs earned about 1.2 percentage points less per year than the funds themselves – mostly bad timing on contributions and withdrawals, per Morningstar’s Mind the Gap study (investor return 8.7% vs fund total return 9.9%).

Headline averages also lean on arithmetic means. Those look prettier than the compound growth you actually get once volatility shows up. Plan on the pretty number and the spreadsheet lies.

Reverse-Engineer Your Own Good Rate of Return

Forget “what’s a good rate” in the abstract. What rate do you need – after costs and inflation – to hit the goal with risk you can hold? Compare that required rate to realistic portfolio expectations.

Step 1: Define the goal and time horizon

Retirement nest egg in 25 years? House down payment in 6? Shorter horizon usually means less stock risk and a lower expected return in the model.

Step 2: Work in real (inflation-adjusted) terms

~3.4% CPI year-over-year as of July 2026 (BLS-linked prints). Long-run inflation sits near 3%. So a 10% nominal stock return is roughly 6-7% real. Cash that lags inflation? Slow bleed on purchasing power.

Step 3: Subtract realistic costs

Expense ratios, advisory fees, taxes. A 1% all-in fee turns a 7% real market path into 6%. Decades of that gap get ugly. Use low-cost broad index funds or ETFs if they match the plan.

Step 4: Match the rate to a portfolio you can hold

Long-run stock and bond series come from sources like Damodaran’s NYU historical returns; yields and CPI are current levels, not forecasts. After strong recent equity runs, NerdWallet has leaned toward ~6% nominal for forward stock planning – more conservative than raw history.

Pro tip: For retirement math, try a conservative real return (say 4-5% for a stock-heavy mix after fees) and a stress case 1-2 points lower. If the plan only works at 9% forever, it doesn’t work.

Good rate = the one that, with your savings rate and timeline, still funds the goal when markets are rude. Long-horizon stock investors who cleared ~7% real over decades did fine. A bond-heavy retiree who beats inflation by a couple of points with less drama also wins.

Real-World Example: Sarah’s Required Return

Sarah is 40. $180,000 invested, $12,000 saved per year, wants about $1.2 million Currently, dollars by 65. Twenty-five years.

Simple future-value math on purchasing power: she needs roughly 5-6% real annualized if contributions keep coming. A low-cost global stock/bond mix has often lived in that neighborhood. No need to swing for 12% every calendar year.

Sequence risk is the separate stress test. Ugly markets in the first five retirement years – while she’s withdrawing – can gut an account even when the long-run average looks fine. She keeps a cash/bond buffer for early withdrawals and leaves growth assets alone longer. The “good” rate isn’t a brag number. It’s the rate that keeps the plan alive when timing is imperfect.

Three Practical Checks Before You Celebrate a Return

• Is it real and after costs? Subtract inflation and known fees. A 9% taxable brokerage gain after 3.4% inflation and taxes is not the same as 9% inside a Roth.
• Did you capture it? Behavior gap is real. Buy-and-hold diversified funds usually beat the average investor chasing last year’s winners.
• Could you hold through the drawdown that produces that average? Those long-run stock numbers only accrued to people who stayed put through multi-year losses (2000-02, 2008, 2022).

The catch with averages: a portfolio that goes +50% then -33% shows +8.5% arithmetic and ends flat. Geometric/CAGR (or money-weighted results when cash flows move) is what multi-year judgment should use – not the headline mean.

Ever notice how “the market averaged 10%” feels comforting until your statement shows -18% the year you needed the money? That tension is the whole game.

FAQ

Is 10% a realistic yearly target for stocks?

No. Long-run average near 10% nominal including dividends; most single years are nowhere near it. Use mid-single-digit real assumptions for planning.

What’s a good return for a balanced portfolio vs. all stocks?

All-stock won over very long stretches – and swung much harder. Classic 60/40 often landed mid-to-high single digits nominal across full cycles, smoother path. If a 40% equity drop would force a sale, the “worse” expected return with more bonds is the better personal outcome.

How do I know if my personal rate of return is good enough?

Benchmark first: total-market stock fund for stock money, bond index for bond money, same period. Then compare to your written required rate after inflation and fees. Beating a random internet number means nothing. Hitting the rate that funds your timeline is the only definition that matters. Add or withdraw cash often? Track money-weighted return – simple start-to-end percentage will mislead you.

Next action: Open a spreadsheet or any investment calculator. Current balance, monthly savings, years to goal, conservative real return (start 4-5%). See the gap. Lower fees or raise savings until the plan closes – before you hunt a “higher return” product.