Historical Investment Returns

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Historical Investment Returns: Telling The Real Story on Investing Today

By Dr. Steve Sjuggerud, President, Investment U
Thursday, December 19, 2002: Issue #198

How much can you really expect to make investing?

I’ll tell it to you straight today. But you might not like my answer. However, remember that I’m not a stockbroker, or a financial planner, or a mutual fund company. I’m not trying to sell you a mutual fund, or trying to get you to give me your money to manage. I don’t do that anymore, I’m glad to say.

Therefore, I have nothing compelling me to force you to invest in the stock market. In fact, just two Investment U E-Letters ago, I made the case that stocks could be 41% lower five years from now than where they are today.

My only mission is to consistently give you the best independent investment advice you’ll find anywhere. I don’t have any ulterior motives other than to make you a smarter, better, more-informed investor.

So what is the Real story on investing? What can you really expect to make?

The truth? Nobody knows that answer. Meantime, I’ve gleaned data from about 1,600 years of historical investment returns to give what I think may be the most complete answer anywhere

What We Can Learn From 1,600 Years Of Historical Investment Returns

I recently studied 100 years of investing returns. But I didn’t just look at the U.S. I looked at 100 years of investment data for 16 different countries around the world, weighted by size. This way, my results wouldn’t be skewed by the relatively good century the U.S. had. Here’s what I found:

STOCKS around the world brought home an annualized gain of 9.2% a year in U.S. dollars from 1900-2000, including dividends. (It’s important to mention dividends, because dividends made up almost half of your investment return in the 20th century.) The U.S. did better, returning 10.1% a year.
GOVERNMENT BONDS around the world returned 4.4%. Again the U.S. did better, up 4.8%.
And CASH (as measured by short-term Treasuries) returned 4.1%.

So, our historical data shows that stocks made 9.2%, bonds made 4.4%, and cash returned 4.1% in the 20th century. That includes war and peace, inflation and deflation, and bubbles and bustsa little bit of everything. Since we can’t know the future, we can use these numbers as our starting point for what’s possible here in the 21st century.

What To Expect In The Next Five To Ten Years

The problem is, chances are we aren’t going to be around for the whole century. What matters is the next five years or the next ten or whatever your horizon might be.

While stocks may return 9% over the 21st century as well, I do believe that stocks will likely not be a great investment over the next five years. In fact, you may actually lose money over the next five years in stocks.

So what about Treasury bonds and cash? Bonds pay 4% and cash pays, well, next to nothing these days. Bonds, like stocks, are in trouble too. Bill Gross (the Warren Buffett of bonds) says, “there’s little doubt from this Bond Man that the bond market’s salad days are over. 4-5% annual total returns at best over the next several years should be expected.”

Conclusion: I Go by What History Tells Me

Ouch. Summing up, chances aren’t good for making money in stocks, bonds, or cashbased on the historical investment and current market returns reviewed in this issue.

So how can we invest successfully in the coming years? The truth is, there is always ample opportunity for intelligent investors to make money. In some markets, though – like the one we’re in at the moment – you just have to work a bit harder to find success. We’ll examine some of those opportunities in greater detail in upcoming Investment U E-Letters

Good Investing,

Steve

Today’s IU Crib Sheet

It’s important to make sure that you enter any investment with a clear understanding of both your risk and your expected return. When you look at the numbers over the past 100 years (9.2% return for stocks, 4.4% for bonds and 4.1% for cash), it’s easy to see how unrealistic many investors are about their returns. In fact, going forward, I think it’s likely that stocks will be lower in five years.
The historical return numbers over 100 years across 16 countries come from the book The Triumph of the Optimists, by Dimson, Marsh, and Staunton. I wish I could recommend it, but I think the majority of folks would find it boring and not worth the hefty price tag. There are many other books on our Recommended Investing Books page you ought to consider first. (See Investment U # 206 for a complete list of investment books I recommend.)