Sorry, You Won't Earn 10%

Around here, we like to take the long view of investing, and so we tend to talk about how over the long haul (many decades), the stock market has averaged a 10% return.

That kind of historical context is vital for investors -- without it, we might think our portfolios could reasonably earn, say, an average of 30% or 40% a year over several decades. Or we might think that earning 3% at our bank isn't so bad. It's a benchmark, something to keep our eyes on as we plan for the future and assess the performance of our portfolios.

But you shouldn't give it too much value, either. Because odds are, you probably won't earn an annual average return of 10%.

Timing is everything
The problem is that the market has averaged about 10% a year for most of the past century -- and most of us will only earn returns for a much shorter period of time. When we're in the market does matter.

I thought about this while looking over an old article of mine in which I listed a bunch of blue-chip companies and their 20-year average returns from 1980 to 2000. Those numbers were impressive -- but what would they look like now? Here they are -- see what you notice.

Source: Bloomberg, Yahoo! Finance.

Even though both periods share nearly a decade in common, the numbers are significantly lower in the second 20-year period. Although some companies sported average returns that were roughly the same, many companies saw significant variation.

You know what else I noticed? Even though their returns varied, substantially in some cases, each of these companies also outperformed the broader market in both time periods.

What you can do
You can't control how well the stock market will deliver for you during your particular investing time period, nor can you predict ahead of time how well a particular time period will do.

Although it's good to keep that 10% figure in mind, you want to judge your portfolio on how well it outperforms the broader market -- not on whether it hits a given benchmark. Comparing short-term returns to a long-term average won't tell you whether your portfolio is doing well -- but comparing your returns to those of the market will.

But even more than when you're in the market, your returns depend on what you're invested in. If you want to outperform the market -- and who doesn't? -- you need to select strong and stable companies that will perform well over the long term. Look for companies with strong brands, dedicated management, expanding possibilities, and good financials.

That's what our team at Motley Fool Stock Advisor looks for. It was launched in 2002, in the teeth of another down market, and on average their recommendations are beating the S&P 500 by 28 percentage points. If you'd like to see what they're recommending, just click here for a free 30-day trial. There's no obligation to subscribe.