Historical returns of asset classes within the US

HHere are some useful data about Historical returns of asset classes within the USeach in traditional USD and, more useful for UK investors, in GBP.

By converting US returns into kilos and subjecting them to the wealth-destroying acid of British inflation, we are able to see whether American investment exceptionalism holds up for the British too.

We start with the actual returns of the US asset class including reinvested earnings (in USD) since 1900:

Data from JST Macrohistory And Aswath DamodaranJuly 2024.

As you possibly can see, stocks have performed significantly better over the long run than bonds or money.

Three necessary reservations:

• The seemingly unstoppable rise in stock prices masks many setbacks, similar to the bear market of 2008/09.

• The United States has been one in all the countries with the very best stock market performance over the past 124 years. Extrapolating this development to other regions (and even into the long run) may very well be misleading.

• A UK investor who invests their money within the US is exposed to currency risk, which might increase or decrease your return, as we are going to see below.

Now let’s take a better take a look at the historical annualized returns of US asset classes, including gold and commodities.

Annualized returns of US asset classes (% pa)

Data from Summer Harbour, BCOM TRJST Macrohistory, Aswath Damodaran, The London Bullion Market AssociationAnd Measure valueJuly 2024.

Investment Returns Sidebar – All returns shown are inflation-adjusted annual total returns (including dividends and interest). Investment fees usually are not included.

As the table shows, US stocks delivered returns that significantly exceeded inflation.

There are few other stock markets on the planet that may compete with the US, as our post on global stocks shows. (This article needs updating, but should you think Scandinavia and the opposite English-speaking countries – plus South Africa – are competitors, then you definitely’re on the appropriate track.)

While the outcomes for gold and commodities in US dollar terms are nothing special, their returns on government bonds and money have outperformed their UK counterparts much more significantly than equities in relative terms.

But the query stays: will the monster-truck-sized US profits remain for British investors once they’ve been brought ashore?

Annualized returns of the US asset class in GBP (% pa)

Source: see Table 1

The pound rose against the dollar in 2023, weakening US returns when converted to sterling. In addition, our annual inflation rate was also significantly worse, further reducing the actual return to a UK investor.

Over longer periods, the long-term decline within the pound has boosted US returns for UK investors: a useful hedge against the loss of buying power that comes with our declining influence.

And yet, in the long term, it made little difference whether you consumed your US gains in kilos or dollars. On the UK side, the currency gains were largely offset by our higher inflation (see the “124 years” column).

Most readers probably put money into a worldwide index fund, and due to this fact their wealth depends way more on U.S. stocks than every other market.

But should we also put money into US government bonds before we choose British government bonds?

If you read this text, you’ll realize that the above-average returns from US bonds don’t all the time occur when we want them – that’s, in the midst of a stock market crisis.

Use of historical returns of asset classes

Understanding historical returns is vital since it helps us overcome behavioral biases similar to the recency effect.

The recency bias is our general tendency to imagine that things will proceed as they’ve recently, even when long-term data suggest otherwise.

For example, should you exit in Scotland in October in a T-shirt and shorts without checking the weather forecast – simply because it was sunny yesterday and the day before – you’ll suffer from the recency effect.

(You’ll probably get the flu soon too!)

Therefore, it is vitally misleading to think about only the returns of 1 asset class over the previous few years when compiling a long-term portfolio.

Only money and really short-term government bonds offer a secure return over a brief time period.

All other asset classes are too volatile for this.

For example, allow us to consider the corresponding historical data for the The USA from the attitude of 2013.

Returns as much as 2013: Annualized returns of the US asset class in GBP (% pa)

Source: see Table 1

You can see that the long-term return figures have hardly modified (stocks, for instance, returned 6.4% each year within the 114 years to 2013, in comparison with 6.9% each year within the 124 years to 2023).

In the short term, nonetheless, things look different.

Contrary to popular expectations, 2013 was an impressive 12 months for US equities. However, returns over the past 10 years were still affected by the worldwide financial crisis, while bonds and gold benefited from it.

In the long run, the characteristics of the varied asset classes will generally prevail again, although gold’s true potential stays a mystery.

Short and good

Stocks are inclined to outperform other asset classes within the medium to long run, precisely because they’re significantly riskier within the short term.

If expected returns on stocks were higher than on bonds, nobody would like these less volatile and very protected bonds – and stock prices would fall accordingly until expected returns rose.

This is precisely what happened after boom phases in stocks similar to 1999 or 1929.

But while all this seems obvious in hindsight, finding the appropriate time to enter the market to avoid booms and busts is notoriously difficult.

Almost all the stock market prediction methods you’ll examine have proven to be very unreliable, and the very best method will not be significantly better.

This means that almost all individuals who want to save lots of and invest for the long run are best advised to follow a passive investment strategy and rebalance their portfolio often to mitigate ups and downs.

Long-term – similar to saving for retirement over 40 years – the characteristics of the varied asset classes similar to stocks, bonds and money should develop in the identical way as up to now.

So, when using an investment return or compound interest calculator, it’s superb to make use of long-term historical returns as a proxy for the required interest function. Just take note that the U.S. stock market has been among the finest performing of all developed countries.

Historical returns on UK asset classes provide a more cautious reference point.