Long-Run Returns For Different Investment Vehicles

Here you can see the trade-off between risk and return of several investment vehicles. Savings Accounts usually pay an interest rate close to the Inflation rate. CDs have interest rates close to the returns on Treasury Bills. We measure risk by the standard deviation (SD), which measures the volatility of a stock. The higher the volatility, the higher the risk your investments are facing.

You can see that over time, returns and risk change. Over the last five years, the stock market has had a stellar performance, given historical standards. This performance has been too good! Remember what my mother used to say, "If something is too good to be true, it probably is." Therefore, you should not expect the returns in the past five year to repeat in the long-run.

Return on
   
  Treasury Govt Corp Small
Inflation Bills Bonds Bonds Stocks Stocks
  1926-1995: 70 years
Average 3.22% 3.77% 5.54% 6.02% 12.52% 17.66%
Risk (SD) 4.57% 3.27% 9.25% 8.71% 20.42% 34.37%
Maximum 18.16% 14.71% 40.36% 42.56% 53.99% 142.87%
Minimum -10.30% -0.02% -9.18% -8.09% -43.34% -58.01%
1976-1995: 20 years
Average 5.27% 7.31% 11.22% 11.21% 15.36% 21.23%
Risk (SD) 3.27% 2.97% 13.61% 12.79% 13.66% 19.94%
Maximum 13.31% 14.71% 40.36% 42.56% 37.43% 57.38%
Minimum 1.13% 2.90% -7.77% -5.76% -7.18% -21.56%
1991-1995: 5 years
Average 2.83% 4.30% 13.90% 12.62% 17.39% 25.31%
Risk (SD) 0.16% 1.24% 14.73% 12.16% 15.67% 15.59%
Maximum 3.06% 5.60% 31.67% 26.39% 37.43% 44.63%
Minimum 2.67% 2.90% -7.77% -5.76% 1.31% 3.11%
Source: Ibbotson Associates.
 
Notes:
Inflation: Rate of change in the CPI
Treasury Bill Returns: Return on T-bills with one month (approximately) to maturity
Govt Bonds Returns: Return on U.S. government bonds with twenty years (approximately) to maturity
Corp Bonds Returns: Rate of change in the Salomon Brothers' Long-Term High Grade Bonds
Stock Returns: Total return on the S&P 500 Index
Small Stock Returns: Total return on the smallest 20% of stocks on the NYSE