Historical Investment Returns by Asset Class: 90 Years of Data

Looking at historical investment returns by asset class can be a sobering experience. For the US stock market, the S&P 500 has delivered an average annual return of around 10% over the past 90 years.

Investing in bonds can be a more stable option, but returns have been lower. The 90-year average annual return for the Barclays Aggregate Bond Index is around 5.5%.

Real estate investment trusts (REITs) have historically provided a more stable source of returns, with a 90-year average annual return of around 9.5%.

Understanding investments can be overwhelming, especially with so many options available. Zero-risk investments, such as Treasury bonds held to maturity, money market accounts, and CDs, guarantee up to $250,000 in losses per person.

History never repeats itself, but it's still the best estimate we can get about future returns. Most likely, the longer you hold an asset, the more likely you are to get the historical returns.

Investors can choose from various risk levels, including minimal risk, such as AAA-rated municipal bonds with default rates under 1%. These bonds can double your money in 15.5 years, provided you hold them until maturity.

Investing in the stock market can be intimidating, especially when it comes to understanding what's behind the numbers. The data from Morningstar shows that past performance is no guarantee of future results.

It's essential to look at the bigger picture when evaluating investments. Data over a 15-year period from 2008 to 2022 provides a comprehensive view of market trends.

The source of this data is Morningstar, a reputable financial services company. Their research and analysis are widely trusted in the industry.

Investors should be aware that it's not possible to directly invest in an index. This means that you'll need to choose specific stocks or funds to invest in, rather than simply buying into a broad market indicator.

Investments come with varying levels of risk, and understanding these risk levels is crucial for making informed decisions.

Zero risk investments, such as Treasury bonds held to maturity, money market accounts, and CDs, guarantee up to $250,000 in losses per person.

Minimal risk investments, like AAA-rated municipal bonds, have default rates under 1% and can double your money in 15.5 years.

The Barclays U.S. Aggregate Bond Index provides a 5% annual return, making it a moderately risky investment option.

Higher risk investments, such as the stock market, have returned anywhere from 8% to 10% a year on average, but can also experience violent corrections.

Retirees typically have a combination of different risk levels in their investments, and it's essential to consider their individual risk tolerance when determining asset allocation.

Many investors prefer to invest using passive investment strategies and "lazy" (but smart?) portfolio management.

Increased knowledge, lower costs, and a rise in fund offerings have contributed to this shift.

Passive strategies include a popular asset class called ETFs, which are a type of investment product that tracks an index.

Vanguard offers a range of ETFs that cater to different investment goals and risk tolerance.

Investors can consider the following top Vanguard ETFs for diversification: VEU, VEUAX, VEUAXS, VEUAXS, VEUAXS, VEUAXS, VEUAXS, VEUAXS, VEUAXS.

Investment Strategy is all about making informed decisions about where to put your money. Asset allocation is the key, and it involves spreading investments across different classes of assets, such as stocks, bonds, and money market instruments.

By diversifying your portfolio, you can balance risk and return. This is because different assets perform well in different market conditions, so by spreading your investments, you can reduce your overall risk.

Stocks, for example, tend to be riskier but offer higher potential returns, while bonds are generally safer but offer lower returns. This means that a well-diversified portfolio can help you achieve your investment goals over time.

Asset allocation is not just about choosing between stocks and bonds, but also about selecting specific subclasses within each class. For instance, within the stock class, you might choose between growth stocks, value stocks, or dividend stocks.

Ultimately, a solid investment strategy is one that aligns with your financial goals and risk tolerance. By understanding the different asset classes and subclasses, you can make informed decisions about where to invest your money.

Stocks have outperformed other asset classes over the long term, with $100 invested in 1928 growing to $787,018 by today, compared to $10,041 for gold and $2,249 for cash.

The chart showing 100-year asset class returns is logarithmic, which helps to illustrate the enormous differences in performance between asset classes.

Stocks returned 9.9% annually from 1928 to present, while gold returned 5%. This significant difference in returns is one reason why stocks are often considered a more attractive option for long-term investors.

However, it's essential to remember that stocks are a riskier investment than bonds or other asset classes, which can make them less suitable for certain investors.

Here's a summary of the returns for different asset classes from 1928 to present:

It's worth noting that historical returns can vary significantly based on the asset class and timeframe under consideration.

Stocks don't perform well when interest rates go up, as our backtest reveals that higher interest rates are associated with lower stock returns.

Over the long term, US asset classes have shown varying returns, with equities (stocks) averaging 11.6% per annum over the past 10 years in GBP.

Government bonds, on the other hand, have provided relatively low returns, averaging 1.8% per annum over the same period.

Here's a brief summary of the annualised returns for US asset classes over different time periods:

Stocks tend to perform poorly when interest rates go up, as the financial theory suggests.

This is supported by a backtest that reveals stocks don't do well when rates rise.

The financial theory states that higher interest rates make borrowing more expensive, which can negatively impact stock performance.

In fact, over the long-term, stocks have consistently delivered lower returns as interest rates have increased.

Here's a rough idea of how stocks have performed in different time periods:

As you can see, stocks have delivered steadily lower returns over longer periods, which suggests that rising interest rates can be a challenge for investors.

However, it's worth noting that the impact of rising interest rates on stocks can vary depending on the specific market conditions.

The US interest rate in GBP has had a significant impact on asset classes over the years.

Government bonds in the US have had a negative return of 13.8% in 2013, but their 10-year, 20-year, and 90-year returns have been 2.7%, 3.7%, and 2.1% respectively.

Over the long term, government bonds have consistently provided lower returns compared to other asset classes.

The 10-year return for government bonds is 2.7%, while the 20-year return is 3.7%.

In contrast, cash (Treasury bills) has provided a positive return of 1.1% over 114 years.

Portfolio management is a crucial aspect of investing, and understanding historical investment returns by asset class can help you make informed decisions.

Investing in stocks has historically provided the highest returns, with an average annual return of 10% over the past 50 years.

However, this comes with higher volatility, as seen in the 2008 financial crisis when stocks plummeted by 37%.

Investing in bonds, on the other hand, has historically provided more stable returns, with an average annual return of 4.5% over the past 50 years.

Real estate has also been a popular investment choice, with an average annual return of 8% over the past 50 years.

It's essential to diversify your portfolio to minimize risk, as seen in the 2008 financial crisis when a diversified portfolio with a mix of stocks and bonds only lost 10% of its value.

Historically, a 60/40 stock-to-bond ratio has been a common and effective allocation for investors.

US investment returns have been a topic of interest for many investors, and for good reason. The US market has consistently delivered impressive returns over the long term, with US equities having returned 6.7% per annum over the past 124 years.

One of the most striking things about US investment returns is the difference between US and UK returns. According to data from 2023, US equities returned 21.9% per annum, while UK equities returned 16.5% per annum. This is a significant difference, and one that highlights the importance of considering global market trends when making investment decisions.

Over the long term, US investment returns have been driven by the growth of the US economy and the rise of the US stock market. As of 2023, US stocks account for 70% of global market capitalization, and have consistently outperformed international stocks.

Here are some key statistics on US investment returns:

As you can see, US equities have consistently outperformed other asset classes over the long term, with returns ranging from 6.7% to 21.9% per annum. This is a compelling case for investing in US equities, particularly for those with a long-term perspective.

Let's take a closer look at the performance of different asset classes over the decades. Stocks can go sideways or even negative over a decade, as seen in the 2000-2007 period where the S&P 500 had a negative return of 1.7%.

The table below shows the annualized returns of US and international stocks over various periods. US stocks have performed dramatically better than international stocks, with US stocks accounting for 70% of global market capitalization as of writing.

The correlation between the periods is 0.57, showing that the performance of US stocks has been relatively consistent over time. However, it's worth noting that this has not always been the case, as seen in the 2000-2007 period where international stocks performed much better.

Understanding historical investment returns is crucial to making informed decisions about your portfolio. It's essential to look beyond short-term fluctuations and consider the long-term trends.

Historical returns can be a valuable guide, but it's essential to remember that past performance is not a guarantee of future results. The chart showing rolling returns of the S&P 500 from 1993 until today illustrates this point.

The longer you hold an asset, the more likely you are to achieve the historical returns. This is because returns snowball over time, making it more likely to get the long-term average return.

It's also essential to consider the volatility of returns. The blue line on the chart shows three-year annual returns, which are more erratic and volatile than the yellow line showing ten-year annual returns.

Here's a breakdown of US asset class annualised returns in GBP (% per annum) over different time periods:

The table above shows the average annual returns for different asset classes over various time periods. It's essential to consider these long-term trends when constructing your portfolio.

Understanding historical returns can also help you avoid recency bias, the tendency to think that things will continue in the same vein as they have recently. This is especially important when considering short-term fluctuations in asset class returns.