The stock and bond markets are the most established financial assets providing global investment opportunities. However, they can also be risky investments due to their volatility.
Therefore, historical stocks and bond returns are critical if you want to understand their performance over time. They give market insights to help you make more informed decisions.
Historical Stock and Bond Returns-Why You Should Care
I’m a bit obsessed with historical stock and bond returns. Since I’m a control freak, and the future is unknowable, knowing historical stock and bond returns gives me an illusion of control over my investments.
If you’re wondering why you should care about the average bond return or the stock and bond market performance, read on.
Knowing the average portfolio return helps you plan for the growth you can expect from your investments. Many investment calculators ask you to estimate the future return that you expect on your portfolio. Knowing the historical average returns on bonds and stocks is a good starting point to estimate your expected future investment returns.
For example, knowing 60/40 portfolio historical returns helps you estimate whether you’ll meet your financial goals. However, before we dive deeper, let’s understand some basics.
- Historical Stock and Bond Returns-Why You Should Care
- Historical Stock and Bond Returns – 50 Years
- Annual Average Return on Bonds and Stocks from 1973 to 2022
- What Were 60/40 Portfolio Historical Returns?
- Risk Tolerance and Historical Investment Returns
- Diversification and Asset Allocation Matter- Here’s Why
- FAQs About Historical Stock and Bond Returns
- What is the historical average return of the stock market?
- Have bonds ever outperformed stocks?
- Where can I find historical stock returns?
- What is the correlation between stock and bond returns?
- What is the average return on stocks historically?
- What is the average rate of return on stocks and bonds?
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What Are Historical Returns?
Historical returns refer to the past performance and rate of return of a financial asset, such as a bond, stock, security, index, or fund. For example, Standard and Poors and Haver Analytics show that the average US stock market return has been over 10.00% over the past 100 years.
However, historical returns vary greatly depending on the asset classes and period you choose to examine.
Understanding Historical Returns
To capture a financial asset’s historical returns, analysts and investors must record performance from the start of a year (January 1st) to its end (December 31st). Compiling past annual returns helps you accurately picture your investments’ overall historical returns across multiple years. You can also use the same data to calculate average historic yields per annum.
However, it’s essential to remember that the average returns fail to address potential changes in the rate of return. Some years may observe substantial growth, while others a decrease in performance. Higher return rates balance out the lower/negative returns in this case. So, one year returns might be lower or higher than the average, and rarely equal. Be cautious with short term yields, when predicting future returns.
That said, it’s possible to calculate estimated historical returns for any financial asset, from indexes like the S&P 500, commodities, mutual funds, ETFs, and stocks to real estate investments.
You can also use a historical returns calculator to make more informed decisions and maximize your returns. It calculates the potential return on investment over a period of time. It considers factors such as taxes, inflation, and investment period. You can also use it to compare different investments and choose the one with the best return potential.
When it comes to stocks, the historical stock market returns calculator gives you the stock market performance over a period of time.
For bond investors, the Bloomberg Barclays US Aggregate Bond Index historical returns will give you an idea of how bonds performed in the past. After all, with the current seasoned Baa corporate bond yield at 3.73%, you need to understand that this is lower than the long-term average of 7.29% for this type of bond, according to YCharts.
10-Year Average Baa Corporate Bond Yield
Great – so do historical returns guarantee future returns?
No, not at all.
But, since the perfect crystal ball hasn’t been invented, historical stock and bond returns give you an approximation of how much you might expect to earn on an investment portfolio. Historical stock and bond returns are the next best thing to the crystal ball.
Is it possible that historical returns have nothing to do with future returns?
Of course. But if we accepted that premise, we would lack any guide to approximating future returns. So, we’ll assume that past historical bond and stock, returns can help guide our future projections.
Historical Stock and Bond Returns – 50 Years
The following chart compares the annual returns of
- Stocks, measured by the S&P 500 and bonds
- Cash, measured by the 3- month treasury bill
- Government Bonds, measured by the 10-year U.S. Treasury bonds
Data source: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html
Notice that stock returns are usually higher than bond returns, although not always. It’s also useful to realize that there are large differences in stock and bond returns from year to year.
In some years, stocks and bond returns show an inverse relationship; when stocks go up, bonds go down. Yet, that’s not always the case. In 1995, all asset classes were positive. The S&P 500 returned over 37%, while Treasury bills and Treasury bonds returned 5.52% and 23.48%, respectively.
As high as the returns were in 1995, in 2008, during the subprime mortgage crisis and recession, the S&P 500 declined -36.55%. That same year, the 10-year Treasury bond rewarded fixed income investors with a 20.10% gain, as investors sought safer investments.
Rarely are stock and bond returns directly correlated. Yet, 2022 is the only year, during the previous 50, where stock and bonds both exhibited negative returns. In 2022, the S&P 500 lost -18.01% while the 10-year Treasury fell -17.83%. While short term cash investors held steady with a 2.02% average T-bill return in 2022.
Historically, stocks have the best and worst performance.
The 3-month U.S. Treasury bill and cash proxy had positive returns and were the least volatile asset, with the lowest average returns.
Clearly, investing in stocks is the riskiest asset class with the most volatile returns. While bonds are less volatile with historically lower average returns.
As 2022 demonstrated, investors might consider adding cash to their portfolio in the form of 3-month Treasury Bills, or certificates of deposit , as interest rates rise.
Use this Empower Retirement Planner to find out if you’re on track for retirement. They do the return projections for you! (click on image below)
Annual Average Return on Bonds and Stocks from 1973 to 2022
The previous graph shows the 50-year annual return on stocks, cash, U.S. Treasury and corporate bonds.
Next, we’ll explore the average annual returns for bonds, stocks, and cash during various periods.
Investment returns vary depending upon the time period examined. While the 50 Year Average Annual Returns for Stocks, Bonds and Cash showed annual average returns. The next chart, “Geometric Average Annual Returns for Various Periods” explores the average returns over longer periods. You’ll notice that in each period of time, returns were positive for stocks, bonds and cash assets. Over 50 years, from 1973 through 2022 stocks averaged 10.24% average annual returns while 10-year Treasury Bonds delivered 6.12% on average, while cash yielded 2.06%.
Examining the 1973 to 2000 time period, investment market returns were extraordinary. The S&P 500 returned nearly 13% on average with 10-year treasuries and 3-month T.bills providing annual returns of 8.35% and 6.36% respectively.
This golden period included the -22% drop in the Dow Jones Industrial Average (DJIA) Black Monday stock market drop on October 19, 1987 as well as the irrational exuberance in the stock market during the build up of the dot-com bubble from from 1995 through 1999. The last five years of the decade saw double digit stock market returns every year.
But as we’ve seen with all stock market bubbles, there comes a breaking point and the early 2,000’s experienced losses during the first three years of the new millennium.
Stock, 3-month T. Bill and 10-year T. Bond Returns – 2000 through 2022
Since 2,000, average annual returns were lower than previous periods. Stocks averaged 6.20%, bonds 3.89% and cash a paltry 0.55%. Check out the annual returns of each asset class to shed some light on why the 2000’s have underperformed the last 50 year averages and those of the 1973 to 2,000 period.
Stocks had to recover from their overvaluations at the end of the decade. We also saw the 2008 mortgage melt down with a -36% stock market loss. Then 2022 attempted to return stocks to a more reasonable valuation, after the runup in valuations and returns from 2019 through 2021. With low inflation and low interest rates during most of this period, decent cash and fixed yields were hard to come by.
What does this mean going forward?
Can we use historical returns to predict the future?
Reversion to the Mean Drives Future Investment Returns
“Mean reversion is a theory used in finance that suggests that asset prices and historical returns eventually will revert to the long-run mean or average level of the entire dataset.,” ~Investopedia
If mean reversion holds true then you would expect that future financial asset returns going forward will return to the averages.
A stellar example of return to the mean is demonstrated during the first ten years of the millennium.
S&P 500 Average Annual Returns – 2000 to 2009
Data source; http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html
During the first three years of the decade, the stock market lost 9.03%, 11.85%, and 21.97%. If all of your investments were in the stock market, that would have been a painful three years.
During the first decade of the century, the average annual stock market return was negative .726%, according to the DQYDJ.com S&P 500 calculator.
This dismal stock market performance from 2000 to 2010 is an ideal example of mean reversion.
First, we have the 50 year returns of stocks, bonds and cash. We’ll call this the mean or long term average returns:
Stock, Bond and Cash Returns – 1973-2022
Now let’s break it into two periods. From 1973 to 1999, all asset classes soared:
Stock, Bond and Cash Returns – 1973-1999
Stocks, bonds and cash average annualized performance was significantly higher than the average with stocks delivering nearly 13% annually, bonds 8.35% and cast 6.36% At the end of 1999, there were those who said, we’re in a new paradigm and historical asset class returns don’t matter.
Those who said “this time it’s different,” were sadly disappointed during the next period. We know the first ten years of the millennium disappointed stock market investors. Notice the “reversion to the mean” with stock, bond and cash returns from 2000 through 2022.
Stock, Bond and Cash Returns – 1973-1999
2022 was a needed bear market in stocks and bonds, to help assets return to fairer valuations.
If you are seeking the answer to the question, ‘How will stock and bond markets perform in the future?’ it’s likely that you’ll find a range of responses from a variety of smart investment professionals. If reversion to the mean plays out, then you might expect a return to more moderate stock, bond and cash returns.
The volatility of investment markets is a reminder that stock and bond investing is best for money you won’t need for a long time.
What about bond performance? Can we expect future bond yields to rise?
On January 31, 1986, the Baa corporate bond yield was 11.36%. Yet, as demonstrated by the graph at the beginning of the article shows corporate bond yields have trended downward since 1986, with a few periodic reversals.
So, future bond performance appears to be more of a mystery.
If the reversion to the mean theory holds true, then over the next decade or so, we may see higher interest rates and higher bond yields. Yet, the problem with this calculus is that as interest rates rise, bond values fall. And with current low interest rates, there’s more room for them to rise than fall.
By examining historical bond and stock returns, you can use the reversion to the mean theory to inform future return projections.
What Were 60/40 Portfolio Historical Returns?
Many portfolio managers, financial planners and investors adhere to a 60/40 investment portfolio. This equates to 60% invested in stocks and 40% invested in bonds.
To calculate a 60/40 portfolio historical return, we’ll use the S&P 500 average returns for the 60% stock portion and the 10-year Treasury bond average returns for the bond/fixed investment category.
Your return will vary depending upon how many distinct stock asset classes and types of bond assets you select.
Using the above data, had you invested in the 60/40 portfolio, your average annual returns would have been as follows:
- 1973 to 2022 – 8.59%
- 1973 to 1999 – 11.09%
- 2000 to 2022 – 5.28%
Due to the losses during the first part of the 2000’s and the deplorable losses of both stocks and bonds during 2022 (-18.01% for the S&P 500 and -17.83 for the 10 year Treasury), the recent 23 years were volatile and on average lower than the investment performance norms.
The double digit losses in both stocks and bonds in 2022, was a rare occurrence.
Yet, with low inflation during the 2000 to 2022 period, your real returns, inflation adjusted weren’t too bad.
Learn: Should I Buy Bonds Now?
Risk Tolerance and Historical Investment Returns
Your risk tolerance, or comfort with the ups and downs of your investment portfolio will drive your investment mix.
More conservative investors and those that are approaching retirement will lean towards an investment portfolio with a greater percent of bond type investments.
Younger and more aggressive investors will own greater percentages of stock investments.
This “Best Asset Allocation Based on Age and Risk Tolerance” will give you a rubrick for choosing your investment mix.
You’ll also find risk tolerance and asset allocation templates. I also like Rick Ferri’s Core 4, for easy to craft investment portfolios.
After you’ve selected a reasonable asset allocation, then use the historical asset class returns to drive your expected future returns.
Be cautious of websites that suggest future stock market returns will be greater than 9% or 10%. Maybe this will hold for a year or two, but the chances are slim that the stock and bond market returns will match those of the previous decade.
Diversification and Asset Allocation Matter- Here’s Why
Ultimately, you want to create a diversified investment portfolio, so even if one asset class tanks, you’ll be saved from disaster with other better performing ones.
For example, during the first decade of the century with deplorable stock market returns, emerging market stocks averaged over 9% per year.
Investment Returns of Various Stock Market Indexes from 2000 through 2009
Image source: https://www.forbes.com/sites/advisor/2010/09/13/its-not-really-a-lost-decade/#582a10f7cf81
If your portfolio was well-diversified with investments incorporating international and U.S. stocks along with mid- and small-cap equities and a smattering of bonds, then your returns would have been positive during the first decade of the century. The all large-cap US stock and developed markets stock portfolios suffered the most during the early 2000’s.
Historical Stock and Bond Returns Return Wrap Up
No one can predict future investment returns. But, the educated investor who’s aware of the average bond returns and the average stock returns has a leg up on the less-informed investor. The most successful long term investors take the time to learn about investment markets history.
By learning about returns of bonds vs stocks for the last 30 years or so, you’ll have a barometer for the range of stock and bond returns. Then, integrate the reversion to the mean theory, economic news, the Fed and world events into your stock and bond market analysis.
Understanding these concepts will make you a confident investor today and into the future.
FAQs About Historical Stock and Bond Returns
What is the historical average return of the stock market?
The historical average return of the stock market over the long term is slightly more than 10% in the stock market, as indicated by the S&P index. In fact, over the past 10 years, through to March 31, 2022, the annualized S&P 500 performance was 14.5%, demonstrating an outstanding growth rate.
Have bonds ever outperformed stocks?
Yes. Notice the chart above that illustrates the “50 Year Annual Returns of Stocks, Bonds and Cash”. Any time the green bond line is above the blue stocks line, bonds have outperformed stock returns. You’ll notice that before 2011, there were many years when bonds outperformed stock market returns.
Where can I find historical stock returns?
The Macro Trends website provides detailed S&P 500 Historical Annual Returns if you’re interested in learning more about stock market returns. Additionally, the NYU Stern website provides historical returns on stocks, bonds, corporates, gold and real estate. Investopedia also has a great article on the Average Return of the Stock Market: S&P 500, Dow Jones.
What is the correlation between stock and bond returns?
The correlation between stocks and bond returns is the most critical aspect when constructing a traditional portfolio. During the first 2 decades of the 21st century, stocks and bonds often moved in the opposite direction (negative correlation). Due to the negative correlation, investors largely relied on their bond investments for protection from volatile equity markets. Bonds and stocks are typical inversely correlated, but not always.
What is the average return on stocks historically?
Historically, the average return on stocks is 10%. However, it’s important to remember that not everyone can expect this average rate of return as the markets are often unpredictable. Thus, conservative investors should lower their expectations and forecast a 7-8% long-term portfolio performance when investing in stocks.
What is the average rate of return on stocks and bonds?
The average rate of return on stocks has been about 10% per annum for nearly the last century, as measured by the S&P 500 index. The long term average annual return for bonds is roughly 5.0%.
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