History of Returns

We want to form an opinion about future returns. We can learn a lot by looking at the past.

We will take advantage of comprehensive US databases to look at the historical returns on various classes of US assets.

You may want to refresh your memory about the difference between 'real' and 'money' returns in 'Real Returns'. All returns on this page are real returns. Also refresh the concept of Risk Premiums.

The US results in this section are lifted from a famous series of US studies by Jeremy Siegel. Since this website was first written Siegel has updated his book three times, but we stay with the original numbers. We are trying to obtain understanding here, not get at absolute truth.

The return on equities

The real return on US stocks (i.e. the returns in excess of inflation) for the 194 years 1802-1996 was 6.9% per annum. If you think this is low you have been having too many drinks in City bars.

Cutting this period 1802-1996 into three big chunks, we get:



Surprisingly stable! But only because we've averaged along very long periods.

How similar were the returns across markets? The real dollar returns per annum on stocks in the 70-year period 1926-1996 were:



Fairly stable! (This period included WWII)

Oh, and what about the UK in sterling terms?

112 years, 1900-2012 50 years, 1962-2012 20 years 1992-2012
5.0% 5.5% 4.5%

Still surprisingly stable!

  • Does this mean we can expect a 5% real return on stocks in the future? No!
  • Does this mean that we can expect a 5% return on stocks over short periods? Definitely not!
  • All this means is: to set expectations for the investment returns available over long time horizons, a 5% real return on equities might be a good number to start with. 

The return on US Government bonds

These are what in the UK we call 'gilt-edged securities'. Being underwritten by the government these are (fairly) safe but subject to interest rate risk.

The real return on US government bonds in the 194 years 1802-1996 was 3.4% per annum. Notice the risk premium of US equities over US bonds was just 3.5% (6.9% minus 3.4%)

The return on cash.

The 194-year real return on US short-term dollar deposits was 2.9% per annum. The bond/cash risk premium over this time was therefore 0.5%. (Returns on both cash and bonds have been much lower in the last 80 years, but that's another story).

The return on gold

The 194-year real return on gold was 0.1% per annum.

Gold is a non-income producing asset that we would expect to track inflation and therefore earn a real return of zero. There's a lesson here for those who would make their money from commodities.