Investment Returns


The long-term historical data show the relative investment returns of various asset classes. Looking at the major asset classes over the last 200+ years, stocks have performed the best, followed by bonds and Treasury bills. If you look at more recent periods, e.g. the last 20, 30 or 40 years, you get similar results.

slide-13-newIn the long run, notice that the value of the U. S. dollar has fallen in real terms (inflation adjusted). Its current value is equivalent to what 6 cents would buy in 1801. Gold, which is viewed as an inflation and currency hedge, is worth $1.95 in terms of 1801 dollars.

The dollar has depreciated due to inflation, most of which was created by our Federal Reserve Bank policies. In the recent years since the 2008 financial crisis, T-bills and some short-term bonds have earned less than inflation, so investors have lost money in real terms.

Superior Performing Assets

The tables below show long-term returns of various asset classes. A few things stand out:

  • Small-cap stocks have outperformed large-cap stocks.
  • Value stocks have outperformed their average stock counterparts.
  • Emerging-market stocks have outperformed the foreign developed country average (as measured by the EAFE foreign equity index).
  • Precious-metals stocks have outperformed large-cap and small-cap stocks.
  • U.S. High Yield and Emerging Markets bonds have outperformed other types of U.S. Bonds and bills.
  • Private equity has had relatively high returns compared with all types of traditional stocks.
  • Gold has not returned much on a real basis.

Warning: Past returns may not be indicative of future returns! Investors should weigh many factors, including risk of the given asset class, when deciding how much to invest in a given asset. So please don’t rush out now and assemble a portfolio based on these returns without looking at Selecting Your Assets. 

Caution: Your Results Will Vary with Time

A problem with selecting the historically best performing investments is that the performance of a given asset class or sub-class can vary widely. This can be the case over a year, three years, ten years or even 20 years. It is impossible to predict future returns on a consistent basis.

Take a look at the charts below to see the variation in returns of asset classes in the last five years.

Annual Returns of Benchmark Asset Classes

From the previous charts it is evident that the best performing asset class varies from year to year and over longer periods, e.g. 3-10 years. For example, from January 2000 through December 2009 the S&P 500 lost 24% of its value and delivered a total return (including dividends) of about minus 9 percent (data from Wells Fargo). From 2001-2012, gold went up 12 straight years, then dropped by 28% in 2013. No one can reliably and consistently predict asset-class returns, or even the relative returns of asset classes year to year. However, as we will discuss later, diversifying and holding a mix of asset classes for the long run is a good strategy.

Time is on Your Side

The longer you hold an asset, the more likely you will make a positive return. However, most investors don’t hold for the long run. They buy and sell at the wrong times. Too much activity is our enemy. The best investors choose solid investments and hold them a long time. The old saying is: “set it and forget it.”

Maximum & Minimum Real Holding Period Returns for Stocks, Bonds and Bills (1802 through 2006)

What does the Future Hold for Returns?

“It’s tough to make predictions, especially about the future.”
– Yogi Berra

In order to construct a portfolio it is useful to have a gauge of expected future returns of various asset classes. Naturally, there is much uncertainty in predicting returns. A good starting point is to look at historical returns over very long periods, noting that there can still be substantial variation in returns over different 10-15 year periods. For your convenience below we repeat the historical returns cited above in the tables, along with forecasts from various professional sources.

Sources: (1) JP Morgan Long Term Capital Return Assumptions, 2014, white paper  (2) Bogleheads  (3)  (4)   (5) Efficient Frontier

Sources: (1) JP Morgan Long Term Capital Return Assumptions, 2014, white paper
(2) Bogleheads
(3) State Street Global Advisors (4) Index Fund Advisors
(5) Efficient Frontier

Sources: (1) JP Morgan Long Term Capital Return Assumptions, 2014, white paper(2) Bogleheads(3)   (5) Efficient Frontier (6) Russell Research (7) Vanguard

Sources: (1) JP Morgan Long Term Capital Return Assumptions, 2014, white paper
(2) Bogleheads
(3) State Street Global Advisors
(4) Index Fund Advisors
(5) Efficient Frontier
(6)Russell Research
(7) Vanguard

The majority of forecasters predict significantly lower returns for U. S. stocks and bonds in the future vs. historical returns due to:

  • High U.S. stock valuations by historical standards.
  • Slower expected long-term economic growth related to the recovery from the Great Recession, high public and private debt, and an aging population
  • Historically low interest rates, with anticipated central bank tightening in the U.S.

Many foreign markets also face potential headwinds from large debt burdens, high unemployment, aging populations and economic structural problems. My opinion is that the more conservative predictions of Bernstein and SSGA are probably closest to what will occur over the next 10-15 years. However, the big warning above from Yogi Berra applies. This makes it imperative to build a diversified portfolio with exposure to select asset classes.

What Can We Expect from US Stocks?

Since most investors have a large stake in U.S. stocks and it’s the largest stock market in the world, let’s take a look at what kind of returns might be expected in the future. Take a look at the chart below.

ure Ten-Year Rates of Return When Stocks Are Purchased at Alternative Initial Price-to-Earnings (P/E) Multiples

You’ll see that when stocks are cheap as measured by the P/E ratio, subsequent long term returns are higher than average. When P/E ratios are high, subsequent returns are low. As of January, 2015 the P/E ratio on the S&P 500 was 19.16, compared to the long run average of 15.5. This portends lower than average equity returns.

Another gauge is the Shiller P/E ratio. The Shiller P/E looks at stock prices vs. their average earnings over the previous ten years. When the P/E was much higher than average, for example in 2001, stocks tend to perform below average in the future. From year end 2001-2011, the S&P 500 returned only 1.5%/yr. When the P/E is well below average, for example in 1931 and 1981, stocks performed well. However, from 1955-1975 and during the 1990s, stocks performed well while the Shiller P/E was well above average. Where is the Shiller P/E now and what does it predict?


As of January, 2015, the Shiller P/E was at 24.3, high by historical standards (the long run median is 15.8). Historically this has produced average real returns over the next ten years of only 0.9%/yr, with a range of -4.41% to +8.3%. However, the Shiller P/E includes the “as reported” earnings results associated with the Great Recession, which can greatly distort the market’s valuation. It includes results from companies no longer in the index that significantly reduced index earnings in 2008-09. Note that these returns exclude dividends. Source: Seeking Alpha

The Shiller P/E is one tool that can be used, albeit with caution, to get some measure of the attractiveness of stocks. P/E ratios in general do provide investors a reasonable gauge of market value and risk. Right now the Shiller P/E suggests a very high-priced market. Historical data suggests a go-forward real return for stocks of only 0.9%/yr plus dividends. The current dividend yield on the Wilshire 5000 is 1.8% giving a total real return of 2.7%/yr.*

However, some make strong arguments that this is a flawed measure.** No forecasting tool or method should be relied upon to make major bets on the stock market’s future direction. All forecasts of future asset returns should be looked at skeptically. The historical and forecasted returns can be used as an imperfect, yet “directional,” aid to investment decisions.

Here is another very interesting article that looks at historical P/E ratios. It suggests stocks have very high valuations now. Take a look at the chart, courtesy of


Conclusion: Caution is in order!

*Source: Barron’s: Stock Returns for the Next 10 Years

**Source: Seeking Alpha: The Shiller P/E

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