Shall we now have a look at the ‘big picture ‘ for investment returns for assorted asset classes versus inflation over the past 70 years. This can give us a broad point of view on the best way to best deploy our investment funds. I believe it is provident that each investor without reference to age or level of investment experience should diversify their investments between real estate, stocks and fixed earnings investments. The table below compares the long-term return performance for Treasury Bills, Gold, Treasury Bonds, corporate bonds, home prices and common stocks.
Kind of Asset Class:
Treasury Bills: 30-Day Maturity
Treasury Notes: 5-Year Maturity
Home Prices: Home Price Appreciation (national average) *
Common Stocks: S&P 500 Stock Index Total Return with
dividends reinvested
Corporate Bonds: 20-Year Corporate bonds
Gold Price: London PM Fix
* Information Source: US Census Bureau and National Association of Realtors
This table reveals that the average annual rate of inflation over the 70-Year period was 4.0%. Treasury Bills produced a 4.1% yearly compounded return over the same period. After accounting for inflation, T-Bills only produced an annual ‘real ‘ return
of 0.1%. Regardless of the powerful return performance for gold over the last a few years, over the long term gold only produced a 1.1% yearly real return after accounting for inflation. Though gold is usually considered protection against inflation, the 1.1% yearly real return doesn't provide much of a return beyond the inflation rate. 5-Year Treasury Notes produced a 1.5% annual real return, corporate bonds a 1.7% real return and home costs appreciated at an annual rate of 2.1% after accounting for inflation.
Only stocks provide a meaningful return after accounting for inflation. The S&P 500 Index with dividends reinvested produced an inflation adjusted compounded annual return of 6.8%. A $1,000 investment in the S&P 500 Index grew to $1,287,957 making a 128,696% total return. Based on this long-term historic return information, only stocks supply a real rate of return after accounting for inflation. Home prices and gold are historically viewed as inflation hedges. Nevertheless the inflation altered annual return for stocks of 6.8% was actually more than 3 times bigger than the inflation changed return of 2.1% for home prices.
This raises the question. Why are stocks the real performance winner compared to other asset sectors and why do stocks provide the only serious real return after accounting for inflation? In the next Chapter we are going to discover why stocks provide the best real return matched against all the other investments.