The Future may not be like the Past, but in most cases the Past is all we have to go on. Errors are made much more frequently in assuming that the Past is not relevant any more and that we are in a "whole new ballgame" where past rules no longer apply! (See especially speculative bubbles.)
The following give the historical yearly returns with standard deviations (risks):
| Category | Time period | Return (%/yr) | Risk (%/yr) | Real Return (%/yr) |
|---|---|---|---|---|
| Stocks | 1926-1982 | 11.6 | 21.5 | 8.4 |
| 1960-1980 | 10.2 | 17.7 | ||
| 1966-1982 | 8.3 | 17.4 | 1.4 | |
| Small stocks (total market value $15-100 M) | 1925-1985 | 12.6 | ||
| 30 year Gov. bonds | 1926-1982 | 3.8 | 7.4 | 0.6 |
| 1966-1982 | 5.0 | 11.1 | -1.9 | |
| Gold | 1960-1980 | 17.6 | 29.2 | |
| 1980-1989 | -7.8 | |||
| 1960-1989 | 9.0 | |||
| Real Estate | 1980-1988 | 4.7 | -1.7 | |
| Real Estate - So. Ca. | 1975-1988 | 12.5 | ||
| T-bills | 1926-1982 | 3.2 | 3.2 | 0.0 |
| 1966-1982 | 7.1 | 2.9 | 0.2 | |
| Inflation | 1926-1982 | 3.2 | 5.0 | |
| 1966-1982 | 6.9 | 3.3 |
Note that the only way to beat taxes and inflation is to take the risk of investing in stocks.
Why do stocks perform best? Businesses are a riskier investment than T-bills, and therefore have to perform better in order to attract capital. Stock ownership is essentially business ownership, since most business profits have to be reflected either in stock dividend payouts or in an increased stock share price.
The prices of commodities, including real estate, are set by supply and demand, and thus no such general statement can be made about them.
The following table compared the results of several different investments over different holding periods.
| Period | Small Stocks | S&P 500 | Gov. bonds | T-bills | Inflation |
|---|---|---|---|---|---|
| 1975-1985 | 27.8 | 14.3 | 9.0 | 9.0 | 7.0 |
| 1965-1985 | 15.3 | 8.7 | 6.0 | 7.3 | 6.4 |
| 1955-1985 | 15.3 | 9.5 | 4.6 | 5.8 | 4.8 |
| 1945-1985 | 14.3 | 11.2 | 3.8 | 4.6 | 4.6 |
| 1935-1985 | 15.2 | 10.7 | 3.9 | 3.7 | 4.2 |
| 1925-1985 | 12.6 | 9.8 | 4.1 | 3.4 | 3.1 |
However, with that historical perspective, see a warning about what might be in store for the future for the S&P 500.
Copyright © 1989, 1996, 1997 by Tom Chester.
Permission is freely granted to reproduce any or all of this page as long as credit is given to me at this source:
http://la.znet.com/~schester/financial_advice/historical_return.html
Comments and feedback: Tom Chester
Last update: 12 May 1997.