Stocks and bonds are two major investment types that interest most investors. Generally, financial advisers recommend holding both types in a diversified portfolio. Investors may want to analyze historical returns of stocks and bonds when choosing the right mix for a portfolio. Historically, stocks have been a much more volatile investment than fixed-income securities such as bonds.
As with any investment, past performance is not predictive of future returns. When comparing the return of stocks versus bonds, investors consider risk. Although bonds on average return less than stocks, the fixed-income securities provide investors with a sense of confidence. Stocks provide an opportunity for significant growth potential in the long term. When comparing asset types, long-term results show the best picture.
Bond returns historically are smaller but more consistent than stock returns. Viewed only in the short term, though, the data can be misleading. In 1983, the U.S. Corporate Index that measures the return on investment grade taxable bonds with a fixed rate showed a 39.2 percent return. In 2009, the same benchmark showed a negative return of minus 4.9 percent. Neither year is typical of average returns when viewed in the long term. Historically, bonds produced an annual average return of 5.8 percent from 1926 through 2009.
Data show that over time stocks produce an average of slightly above 10 percent annually. This takes into consideration both major highs and major lows in the short term. For example, in 1954, stock values increased 52.6 percent -- not an average year. Conversely, in 2008, stocks declined in value by 37 percent -- also not an average year. To compare stock versus bond returns, data for the long term is the best yardstick. From 1926 through 2009, stocks produced an annual average return of 11.8 percent.
A 50-year annualized return for stocks versus bonds shows that from 1959 through 2008 stocks produced on average 9.18 percent annually. During the same period, bonds earned an annualized return of 6.48 percent on average. Campbell R. Harvey of Duke University compiled data showing the cumulative wealth of $1 invested in December 1925 in various assets. In all instances, taxes were not considered and all returns were assumed to be reinvested. The results through June 1995 showed that $1 invested into U.S. small stocks grew to $3,425.25. Total return on the S&P 500 through the same period was $973.85 on a $1 investment. By comparison, $1 invested in U.S. long-term corporate bonds grew to $44.15 during the same period. A $1 investment in U.S. long-term government Treasuries increased to $30.68. The risk associated with each type of investment inversely corresponds to the return. The greater the risk, the higher the potential for return.
- Barclays Capital: U.S. Corporate Index
- Duke University: Finance -- Historical Returns Campbell R. Harvey
- Martin Capital Advisors: Long Term Performance of Stocks, Bonds, T-Bills and Inflation
- NYU Stern School of Business: Annual Returns on Stock, T. Bonds and T. Bills, 1928-Current
- Russell Investments: Stocks and Bonds -- Choosing the Right Option
- Stockbyte/Stockbyte/Getty Images