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Stocks and bonds are the foundation of long-term investing. Over many decades both have tended to produce positive returns, but in the short term they can be volatile and unpredictable. Knowing how stocks and bonds have performed historically helps set realistic expectations and plan for the future.
When measuring past performance, analysts typically use the geometric (compounded) average rather than a simple arithmetic mean because it reflects the effect of compounding over time. Still, annual returns vary widely: some years bring strong gains, others big losses. That variation is why short-term results often differ greatly from long-term averages.
Historical data shows stocks usually outperform bonds over long periods, though not every year. Stocks can deliver the highest long-term returns but also the biggest swings. Bonds tend to be steadier with lower average returns, and cash-like instruments generally offer the lowest returns and least volatility. There have been years when bonds outperformed stocks—for example during market crises when investors seek safety—and rare years when both stocks and bonds fell together.
Studying long periods highlights these patterns. For example, over a 50-year span stocks produced substantially higher average annual returns than corporate bonds and cash, despite including severe drops like the crashes of 1987 and the dot-com bust. The 2000–2002 downturn and the 2008 financial crisis show how stocks can suffer multi-year losses, while bonds often provide ballast. More recently, years with low interest rates produced uneven returns across asset classes.
Bond returns depend heavily on prevailing interest rates. When rates rise, newly issued bonds offer higher yields but existing bonds lose value; when rates fall, existing bonds can gain in price. Total bond return combines interest payments and price changes, so future bond performance is tied to how interest rates move.
Many investors use a mix of stocks and bonds—commonly a 60/40 split—to smooth returns. The exact results depend on the specific stock and bond indices or funds used and the time period measured. Your allocation should reflect your goals, time horizon, and risk tolerance: conservative or near-retirement investors typically favor more bonds, while younger or more aggressive investors hold more stocks.
Two ideas to keep in mind:
– Mean reversion: asset returns often move toward long-term averages over time, so unusually high or low returns may normalize eventually. That doesn’t tell you when reversion will happen, only that extremes often correct.
– Diversification: holding multiple asset classes reduces the chance that a single market collapse wrecks your entire portfolio.
Practical takeaways: use historical averages as a starting point when estimating future returns, but be cautious—history is not a guarantee. Expect volatility, plan for the long term, and choose an allocation that matches your comfort with ups and downs. Understanding past stock and bond behavior gives you a useful perspective for making informed investment decisions.
