You may wish you had time to study the long-term returns of stocks and bonds, and to develop expectations of their future performance, but you just don't. Fortunately, the folks at the Schwab Center for Financial Research do. They recently issued an interesting report.
First, they noted that the historical returns for large-cap stocks and bonds between 1970 and 2008 were 9.5% and 8.3%, respectively. Then they suggested that from where we are now, the returns we might expect over the coming two decades are likely to be a little lower:
|
Category |
Estimated Long-Term Return |
Examples |
|---|---|---|
|
Large-Cap Stocks |
7.4% |
Best Buy |
|
Mid/Small-Cap Stocks |
8.7% |
Markel |
|
International Stocks |
7.4% |
Research In Motion |
|
Bonds |
3.6% |
Treasuries, corporate bonds |
They offered two key reasons for the lower performance: Inflation and interest rates, which they project to be lower than average in the coming years.
What it means
Accepting their projections is somewhat encouraging. After seeing the market tumble almost 40% in 2008, it's nice to see a positive forecast. And if stocks grow at 8% overall over the coming 20 years, that's not too shabby. It will turn an annual $10,000 investment into almost $500,000.
Here's a warning, though: Schwab is just offering an educated guess. The actual average might be considerably higher or lower. Inflation and interest rates might be not what Schwab expects. For instance, Schwab expects just 1.8% annual inflation in the future, but many are already predicting rising inflation due to all our stimulus spending.
We can't control what the ultimate return we'll get will be, but we can best position ourselves to make the most of the market. One way to position yourself well is to diversify your money across large-caps, smaller-cap companies, and international companies. The table above shows how smaller companies are expected to grow faster. Limiting yourself to just one or a few kinds of companies can limit your ultimate performance.
Despite the fact that stocks involve risk, they still have the best potential for growth. Investors who stick with stocks should reap rewards in the long run.
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