Looking at the average of all 20-year annualized asset class returns from 1951 through 2015, equities dominate. Large-cap U.S. stocks delivered an average annual compound nominal return of 10.8%, while long-term U.S. government bonds delivered 7.2%. After inflation, which averaged 3% during this same period, equities delivered real returns nearly two times higher than those of bonds. These differences are further magnified when compounded over time. To illustrate, a $1,000,000 investment in bonds versus equities over this period averaged a 20-year difference of $4.3 million.
HYPOTHETICAL GROWTH OF $1 MILLION OVER 20 YEARS (Average Annualized 20-year Returns 1951 – 2015)
Figures shown are based on the average annual return of all 20 year periods from January 1, 1951 – December 31, 2015 and include the reinvestment of dividends and interest. Source: Ibbotson (cash: 30-day Treasury bills; bonds: U.S. long-term government bonds; stocks: S&P 500 Index). Indices are unmanaged and, therefore, have no expenses.
Investors seek to minimize volatility, which is perceived as lowering risk, preferring to avoid the emotions associated with an unpredictable ride. But there is a sizable cost associated with substituting short-term comfort for a long-term perspective and potentially leaving millions of dollars on the table.
It is critical to understand that volatility is a normal characteristic of equity markets in the short-run. However, over the long-term volatility diminishes in importance while higher rates of compounded returns become the most important factor in determining ultimate wealth. The bumpy ride is the cost of admission for higher returns.
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