How Different Asset Classes Have Performed Over 96 Years
A very interesting table from Charlie Bilello’s X account gives insights into how different asset classes have performed in the US market over the past 96 years. If an investor had stayed fully invested in stocks through the S&P 500 Index, they would have earned a compounded annual growth rate (CAGR) of 10% in US dollar terms. After adjusting for inflation, the real return would have been 6.9% per year. In approximately 73% of the years, stocks gave positive returns. However, the volatility was quite high at 19.5%, and there were periods when the market faced major drawdowns, with the worst being a 65% drop before recovering.
Holding Cash vs. Investing in Stocks
For those who prefer the safety of cash, keeping money in the bank over these 96 years would have provided a CAGR of 3.3%. But after adjusting for inflation, the real return would have been close to zero at just 0.3%. The benefit of holding cash is that there is no risk of capital loss, and there are no drawdowns. However, this also means that the money does not grow meaningfully over time, making it difficult to beat inflation. There are always investors who are extremely risk-averse and would rather keep their money safe even if it does not grow much. On the other hand, investors willing to take calculated risks know that while markets can fall sharply at times, the long-term growth potential of stocks makes up for those declines.
The Role of Bonds in a Portfolio
Bonds provide a middle ground between stocks and cash. Over the last 96 years, bonds have given an inflation-adjusted CAGR of 1.5%, which is not very high but is better than cash. About 79% of the time, bonds gave positive returns, but they still had a maximum drawdown of 21%. For investors who do not want to take high risks, bonds serve as a safe investment with moderate returns. While they do not offer the kind of wealth creation that stocks provide, they do offer a level of stability that cash does not.
Finding the Right Balance with a Mixed Portfolio
Many investors want to earn from the stock market but do not want to take excessive risks. A balanced portfolio with a 50-50 mix of stocks and bonds would have provided a return of 7.8% over the years. After adjusting for inflation, this would still leave a real return of 4.5% to 4.7%. The biggest advantage of this mix is that it reduces the downside risk. The maximum drawdown for such a portfolio would have been 33%, which is significantly lower than the 65% drawdown seen in an all-stock portfolio. For investors who are even more risk-averse, a 70% allocation to bonds and only 30% to stocks would further reduce volatility, with drawdowns limited to around 20%.
Why Gold Should Also Be Considered
This study does not include gold, but for those looking to diversify beyond just stocks and bonds, gold can be a useful asset. Gold often performs well when stocks are struggling, making it a good hedge against market downturns. By including some gold in a portfolio, investors can further reduce volatility and improve overall stability.
Making the Right Investment Decisions
Investors should choose their asset allocation based on their risk tolerance and financial goals. Some can handle the ups and downs of stocks, while others prefer a more stable approach. There is no one-size-fits-all strategy. The market will always have periods of high returns and sharp declines, but how an investor balances risk and reward is what ultimately determines their long-term success. Instead of blaming market movements, investors should focus on creating a portfolio that aligns with their needs.
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