I am trying to judge what a reasonable expectation on personal investment returns might be, over the longest time spans and over the era since about WWII. We are certainly in one of the longest, lowest eras of return from common sources like savings accounts and CDs, but even over times like this and those when savings rates knocked on 10% I am judging that the long-term average return for most individual investor/savers has been about 5%.
By long term average, I mean the time of accumulating retirement funds, with investment periods measured in years, even decades. Certainly rates over shorter periods and with shorter-term goals would vary greatly, but I’m interested in the thirty to forty years of retirement saving over most lifetimes going back to those who began their working career in the late 1940s.
Does 5% sound about right, and is there good, broad-spectrum, nonpartisan economic data to support a figure?
Here is a table from NYU’s Stern Business School that might give you a start. It even shows you the risk premium and computes some averages for you. I’m sure it’s not inflation adjusted or anything like that so assume nominal dollars unless you see something I missed.
Obviously a lot depends on how risky the invests are that you choose and a lot of risk tends to follow the asset class, so bonds as a general rule have less risk and lower returns than stocks. But of course if you bought bonds before the fed started slashing rates, you made out like a bandito. Plus very risky bonds can pay better than say high dividend yield stock in something like a utility company.
I assume that you want that you want this information for planning purposes, so make sure that you include expected inflation in your model also.
Perhaps I’ll seem to be a “wet blanket,” but I will point out that data on U.S. investments is a sample of one, and the single sample – U.S. of America – has enjoyed an almost unprecedented series of successes.
To understand my point, repeat any calculations substituting returns on German stocks and bonds over the past 100 years instead of American returns. (I’m not necessarily predicting that America’s unbroken success streak will end soon, but I don’t think that can be ruled out.)
That raises another good point btw. It goes w/o saying that any portfolio needs to be diversified both within and across asset classes. But the concept now includes geographic diversification as well and that necessarily implies currency diversification.
Even if you buy stock in Walmart or McDonalds, those companies derive a substantial portion of their revenue from foreign markets, so you’ll be exposed to such risks (and benefits) whether realize it or not.
The Dow-Jones Industrial Average has increased by an average of 5.1% per year since it began in 1896. If you put money into stocks and keep it there for a few decades, that’s what you can expect it to earn on average.
The real rate of return of capital is the same as the rate of productivity growth of the the economy as a whole, over the long term. To see why, consider that if the return to capital grew faster than than the economy as a whole, it’d eventually get larger than the entire economy.
Or, to look at it differently, $1 invested at the time of Jesus, compounded annually at 5% would be $2,391,102,204,613,754,331,324,385,694,151,367,850,983,424, today.