Here’s some useful data on historical asset class returns for the US market.
(I’ve also posted historical asset class returns for the UK).
The graph to the right shows US total asset class returns with income reinvested since 1925, as calculated by Barclays Capital.
As you can see, equities (stocks) have done much better than bonds or cash over the long-term.
Two important caveats:
- These nominal asset class returns include rises from inflation, which don’t actually make you any richer.
- This seemingly steady graph disguises a lot of ups-and-downs, such as the 2008/9 bear market!
Let’s now look more closely at historical asset class returns in real terms (that is adjusted for inflation).
US real asset class returns (% per annum)
| 2009 | 10 years | 20 years | 50 years | 84 years | |
| Equities (stocks) | 28.7 | -2.2 | 5.8 | 5.5 | 6.6 |
| Government bonds | -15.5 | 5.0 | 5.3 | 2.9 | 2.3 |
| TIPS | 5.8 | 6.7 | |||
| Corporate bonds | 16.3 | 4.7 | 5.2 | ||
| Cash | -2.6 | 0.2 | 1.0 | 1.2 | 0.6 |
Source: Barclays Capital Equity Gilt Study 2010 (Note: Where data is NOT available, there is a gap).
It’s important to remember that inflation eats away at your savings every year.
The table therefore shows real returns, which is the amount the asset grows (or shrinks) over a period, minus inflation.
If inflation is 3%, then your money needs to grow by at least 3% nominal to keep up with this impact of inflation, after-tax.
- i.e. You need a positive (greater than 0%) real return to keep up with inflation.
Historical asset class returns: long and short-term concerns
When you’re choosing what to invest in over the long-term, it’s very misleading to look at just the last couple of years of asset class returns.
Only cash and very short-term government bonds provide a secure return over a short period. All other asset classes are too volatile for that.
One asset class – say stocks – may do very well, while another does poorly. Stocks would look great that year, but the next year the returns may be different.
Over the longer term – such as 40 years of investing towards retirement – the characteristics of asset classes such as stocks, bonds, and cash become apparent.
What do historical asset class returns mean for you?
Normally at this point an investing article would tell you how stocks have typically beaten all other assets over more than 10 years.
However the last decade has been so lousy for the stock market that equities failed to beat Government bonds (Treasuries) over ten years. They only slightly beat government bonds over 20 years.
Indeed, last year’s historical returns data from Barclays Capital to 2008 had US stocks losing to US Government bonds, even over 20 years!
- Stocks rose nearly 29% in 2009 while ’safe’ Government bonds fell an unprecedented 15.5% in real terms. (Treasuries were in a bubble at the end of 2008).
- Stocks have still only just edged ahead of bonds in terms of annual real returns over 20 years!
- Also note that one extra year (2009) has changed that 20-year result of stocks versus bonds. Different start and end dates can really change the picture.
The poor result for stocks versus bonds over the past 20 years is unusual.
Stocks tend to outpace other asset classes over the medium to long-term, but if you buy them at the end of a bubble period such as 1999 or 1929, you’re unlikely to do very well.
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@Rob Bennett – I have deleted your comment and my patience has finally run out on allowing you to post your opinions about conspiracy in the markets on my blog.
Your comments are misleading and dangerous, and I don’t spend 3-4 hours writing articles to have you append your mantra at the end of every post.
There is no conspiracy about valuation in the stock market. This very article mentions valuation. Another reader Niklas pointed to an article just the other day in the massively influential Economist magazine about valuation: http://www.economist.com/business-finance/displaystory.cfm?story_id=15580336
Everyone knows about valuation. It is discussed non-stop.
In your deleted comment you asked why wasn’t Buffett giving warnings?
He was – he gave a speech at Herbert Allen’s Sun Valley retreat in front of Dotcom moguls at the height of the bubble in 2000. He told them the market was massively overvalued and that many of them would go bust.
Read the start of Alice Schroeder’s Buffett biography The Snowball for a long piece on the Buffett speech. It is a very famous incident.
Then read The Intelligent Investor by Benjamin Graham, which also discusses over and undervalued markets, and the dangers of the former, and thus why it is desirable to invest in the latter.
Graham, who was basically a Mozart/Shakespeare level genius — he spoke a dozen languages including Latin and Greek and made millions in stocks for fun – considered it prudent to keep 25% in stocks in even the most bullish market conditions because he knew how difficult market timing based on valuation or anything else was.
He wrote about valuation in 1935. Yes, this ‘conspiracy’ you see didn’t even exist in 1935.
Enough is enough.
Thanks for the run down.
We’re heavily invested in stocks now, but will slowly turn towards bonds as we get near retirement. As long a we stay diversified, we should be okay. Luckily, we are young enough that this crash actually helped us since we were able to double our shares in less than a year and rode the wave up.
I figure we’ll have to sit through a few more crashes in our lives, so we’ll have a heavy opportunity fund to keep us going through those as well.
Thanks again for the time you took to get those numbers together.
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You really want to be American, yes mate?
Intersting historical study. I really enjoy a 4% risk free return on long term CD’s. It’s fine and good enough for me.
Everything else is play money!
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@Sam – LOL, I admire America and generally like Americans but no, I don’t plan on going for the green card.
The US and its market isn’t just another country, it’s so vast and influential that everyone around the world has to take it into account.
E.g. Well over half of CNBC’s daily broadcasting here in the UK is your US output — morning call etc! I presume not reciprocated.
Besides all that, half my readers are American, and the basic principles apply in all capitalist democracies.
“■Stocks have still only just edged ahead of equities in terms of annual real returns over 20 years!”
Am I mistaken or did you intend to write, “Stocks have still only just edged ahead of [bonds]….?”
@Carlyle – Eek! I certainly did – thanks for spotting the typo… have fixed it now.
Thanks for this blog.The US and its market just not a another country, it’s so vast and influential that everyone around the world has to take it into account.
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