Important Investing Lessons From 200+ Years of Asset Class Returns

Important Investing Lessons From 200+ Years of Asset Class Returns

Posted On June 4, 2021 3:27 am

By Ben Carlson

I’m a sucker for historical market data.

I know, I know. It doesn’t help you predict the future but it can help shape your expectations to allow you to emotionally prepare for a range of outcomes.

This week someone sent me this Long-Term Asset Return Study done by Jim Reid and the team at Deutsche Bank that looks at historical asset class returns going back to 1800.

You have to take any financial market data, call it pre-1950s or so, with a bucket of salt but I still think these numbers can be instructive when thinking about the very long-term for financial markets.

Reid’s research shows the historical real returns on stocks, bonds, cash, housing, and commodities over a number of different time frames:

There’s a lot going on here and this might be hard to read for those of you who don’t have better than 20/20 vision like yours truly (not to brag) so let’s zoom in on some of these numbers.

These are the annual real (after-inflation) returns for U.S. stocks, 10-year treasuries, cash, and commodities:

Some observations:

Short-term returns for the stock market can be highly unpredictable and unstable. Long-term returns for the stock market have been far more stable. While real returns have been elevated for the past 5 and 10 years, there isn’t much of a difference between returns over 15, 25, 50, 75, 100, 150, or 200 years.

This is comforting even if future returns are promised to no one.

It’s also a good reminder that the high returns in the current cycle won’t last forever. You can’t set your iPhone to it but eventually higher than average returns will be followed by lower than average returns.

Returns have been much higher than the long-term averages since 1980 but you can see the numbers since 1999 are working off some of those excesses.

Interest rates have been on the floor since the Great Financial Crisis but the numbers over the past 5, 10, and 15 years show how the safety of cash over the short run can hurt you over the long run.

Cash and short-term bonds can certainly be helpful when you need to spend your capital in the near term but if you hope to beat the rate of inflation over the long term you need to accept some risk in your portfolio.

Sitting in cash will always feel safer than investing in the stock market but the stock market gives you much higher odds of increasing your standard of living.

The performance of commodities may also be surprising to some investors. Commodities have negative real returns over the past 100 years! Now there could be some selection bias here. You can see from Reid’s numbers that gold has a much better track record.

But I look at these results as a positive. It shows progress, innovation, and technology as a deflationary force in the world that most commodity prices don’t keep up with inflation.

Many investors want to be invested in commodities today because of worries about inflation. And commodities can have high returns under inflationary environments.

But stocks have a much better track record over the rate of inflation in the long run.

Now here are the annual real returns by decade:

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About author

Dividend Sensei

I'm an Army veteran and former energy dividend writer for The Motley Fool. I'm a proud co-founder of Wide Moat Research, Dividend Kings, and the Intelligent Dividend Investor. My work can be found on Seeking Alpha, Dividend Kings, iREIT, and the Intelligent Dividend Investor. My goal is to help all people learn how to harness the awesome power of dividend growth investing to achieve their financial dreams and enrich their lives. With 24 years of investing experience, I've learned what works and more importantly, what doesn't, when it comes to building long-term wealth and income streams and achieving long-term financial goals.

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