In my career analyzing financial markets, I have learned that most investment wisdom is revealed not in quarters or years, but in decades. A 25-year time horizon is particularly powerful. It is long enough to smooth out the volatility of business cycles, technological disruptions, and geopolitical shocks. It encompasses multiple bull and bear markets, allowing us to see the true, long-term drivers of wealth creation stripped of temporary noise. When clients ask about average returns over this period, they are often seeking a simple number. My job is to show them that the number itself is less important than the profound lessons hidden within it. Today, I will dissect what 25-year mutual fund returns truly represent, highlight the critical factors that determine your personal outcome, and explain how to use this long-view perspective to build a more resilient portfolio.
Table of Contents
Why a 25-Year Horizon is the Ultimate Litmus Test
A quarter-century is a transformative period. Consider the last 25 years (1999-2023). This span includes:
- The peak and subsequent collapse of the dot-com bubble (2000-2002)
- The robust recovery and housing boom (2003-2007)
- The Global Financial Crisis and Great Recession (2008-2009)
- The longest bull market in history (2009-2020)
- The COVID-19 crash and its V-shaped recovery (2020)
- The recent period of high inflation and rising interest rates (2022-2023)
A fund that has delivered solid returns over this entire period has proven its ability to navigate extreme euphoria, paralyzing fear, and everything in between. For you, the investor, this horizon should be the primary framework for evaluating the strategy of your core retirement holdings. Short-term performance is irrelevant; endurance is everything.
The Illusion of the “Average” and the Scourge of Survivorship Bias
The most important concept to grasp is that the published “average” mutual fund return is a statistical artifact that bears little resemblance to reality. It is profoundly distorted by survivorship bias.
Mutual funds that perform poorly do not survive for 25 years. They are liquidated or merged into more successful funds. Their abysmal long-term track records are simply erased from the databases. When a research firm calculates the “average 25-year return,” they are only averaging the results of the winners—the funds that endured. The graveyard of failed funds, which could represent a third or more of all funds that started the period, is excluded from the calculation.
This means the published “average” return is significantly higher than the actual aggregate experience of the average investor. You are seeing a picture of only the survivors, not the entire army that went to war.
A Realistic Look at 25-Year Net Returns by Category
Let’s move beyond a single average and examine realistic annualized returns for major fund categories for the 25-year period ending December 31, 2023. These figures are net of fees, which is the return that actually lands in your pocket.
Table: Realistic 25-Year Annualized Returns for Major Fund Categories (1999-2023)
| Fund Category | Approx. 25-Year CAGR (Net of Fees) | Key Characteristics & Context |
|---|---|---|
| U.S. Large-Cap Blend (S&P 500 Index) | ~7.5% – 8.0% | The benchmark. Includes two major crashes and powerful rebounds. |
| U.S. Large-Cap Growth | ~7.0% – 7.5% | Hammered by the dot-com bust, but powered by tech thereafter. |
| U.S. Large-Cap Value | ~7.0% – 7.5% | Held up better in 2000-2002 but lagged in the 2010s bull market. |
| U.S. Small-Cap Blend | ~8.0% – 8.5% | Often higher long-term return potential than large-caps, but with higher volatility. |
| International Developed Markets (ex-U.S.) | ~4.0% – 4.5% | Weighed down by Japan’s stagnation, EU debt crises, and a strong USD. |
| Emerging Markets | ~8.0% – 8.5% | Extreme volatility but high growth potential from a low base. |
| U.S. Core Bond (Aggregate Index) | ~4.0% – 4.5% | Provided crucial diversification and income during equity downturns. |
Source: Data synthesized from S&P Dow Jones Indices (SPIVA) and Morningstar. Figures are approximate for illustrative purposes.
The power of compounding at these rates is breathtaking. A \text{\$10,000} investment growing at 8% annually for 25 years becomes:
\text{FV} = \text{\$10,000} \times (1.08)^{25} = \text{\$10,000} \times 6.8485 \approx \text{\$68,485}The divergence between asset classes is also clear. The difference between U.S. and International developed market returns was nearly 4% annually. On that \text{\$10,000} investment, that gap compounds to a staggering difference:
\text{\$10,000} \times (1.08)^{25} = \text{\$68,485} vs. \text{\$10,000} \times (1.04)^{25} = \text{\$10,000} \times 2.6658 = \text{\$26,658}
This underscores a fundamental truth: your asset allocation—your starting decision on how to split your money between these broad categories—is the single greatest determinant of your 25-year outcome.
The Tyranny of Costs: A 25-Year Calculation
If asset allocation is the most important decision, the relentless drag of fees is the most important variable you control. The difference between a low-cost fund and a high-cost fund compounds into a fortune over a quarter-century.
Assume two funds achieve a gross return of 8% annually before fees.
- Fund A (Low-Cost Index Fund): Expense Ratio = 0.05%
- Fund B (Average Active Fund): Expense Ratio = 0.75%
The net annual returns are:
- Fund A Net Return: 8% – 0.05% = 7.95%
- Fund B Net Return: 8% – 0.75% = 7.25%
Now, let’s calculate the future value of a \text{\$100,000} investment in each over 25 years.
Fund A:
\text{FV}_A = \text{\$100,000} \times (1.0795)^{25} = \text{\$100,000} \times 6.840 \approx \text{\$684,000}Fund B:
\text{FV}_B = \text{\$100,000} \times (1.0725)^{25} = \text{\$100,000} \times 5.815 \approx \text{\$581,500}The Cost of Active Management:
\text{\$684,000} - \text{\$581,500} = \text{\$102,500}The investor in the higher-cost fund sacrificed over $100,000 in terminal wealth. This is a conservative estimate. The SPIVA scorecard reveals that over 90% of active U.S. large-cap fund managers have failed to beat the S&P 500 over the last 25 years. This means that for most investors, the high fees of active management bought them underperformance, not outperformance.
The Index Fund: A Case Study in Predictable Outcomes
This math is why a low-cost S&P 500 index fund is such a powerful tool. Its goal is not to be clever, but to be efficient. While any given active fund might have a brilliant 10-year run, its long-term prospects are uncertain. The index fund’s 25-year outcome is predictable: it will deliver the return of the U.S. large-cap market, minus a minuscule fee.
For the 25 years ending December 2023, the Vanguard 500 Index Fund (VFIAX) had an annualized return of approximately 7.7%. Its expense ratio is 0.04%. An investor in this fund captured nearly the entire return of the U.S. stock market with zero manager risk and no need to pick a winning fund.
How to Apply This Knowledge: A Framework for the Next 25 Years
You cannot invest in the past. The last 25 years included unique conditions. Your task is to use this data to inform a strategy for the next 25 years.
- Set Rational Expectations: Do not expect 1990s-like returns. Use a reasonable long-term planning assumption, such as 6-8% nominal returns for a diversified equity portfolio. Adjust for inflation (historically ~2-3%) to understand your real purchasing power growth.
- Prioritize Asset Allocation: Your primary decision is your strategic mix of stocks, bonds, U.S., and international holdings. Choose an allocation you can stick with through inevitable downturns. This discipline is more valuable than any stock pick.
- Minimize Costs Relentlessly: Treat the expense ratio as a direct reduction of your final wealth. In any fund selection, choose the lowest-cost option that fulfills your asset allocation need. This is the one variable you can control with certainty.
- Embrace Boring Diversification: The quest for the “best-performing fund” is a loser’s game. Instead, build a simple, boring portfolio of low-cost index funds that cover the globe. A classic three-fund portfolio (U.S. Stock, International Stock, U.S. Bond) is a proven, resilient strategy for a 25-year journey.
My Final Counsel: The Victory of Process Over Prediction
The “average” 25-year return is not a target to be beaten. It is the market’s reward for patience, discipline, and frugality.
The most successful investors are not those who predict the next top-performing fund. They are those who commit to a sound process:
- They save consistently.
- They build a diversified, low-cost portfolio.
- They reinvest all dividends.
- They hold firm during market panics.
- They ignore the noise and focus on the horizon measured in decades, not days.
Over a quarter-century, this simple, unglamorous process outperforms the vast majority of sophisticated strategies. By focusing on what you can control—your costs, your savings rate, and your behavior—you position yourself to capture whatever returns the market delivers over the next 25 years. In the long run, that is the only strategy that matters.
