What Will Investment Returns Be For The Rest Of Your Life?

by: Eric @ SERVO


Long-term investing success is partially predicated on understanding what investment returns will be and allocating your wealth accordingly.

As Charles Ellis famously said, "the average long-term experience in investing is never surprising, but the short-term experience is always surprising".

Studying periodic, long-term historical market returns gives you the best insight into what the future holds and how you should invest, with several timeless lessons to follow.

Long-term investors really only have two different scenarios they need to plan for: retiring financially secure and staying that way. The first goal is about wealth accumulation over the entirety of your working years so that, when you retire, you've amassed a sufficient nest egg to replace your paycheck. In retirement, you're trying to generate ongoing cash flow and continue to grow your wealth for legacy purposes or to protect against unforeseen expenses (a more expensive retirement, healthcare costs, etc.).

While the investment and financial planning industry is obsessively focused on predicting short-term market and asset-class returns, the long-term investor can safely ignore these prognostications. Not just because they aren't accurate, but because short-term results have very little impact on your long-term results.

This should be a welcome message to serious investors. All of the chatter and ramblings about what the stock and bond markets will do next or what they have done recently is nothing more than a giant distraction from the only meaningful effort - achieving satisfactory lifetime investment results, enabling you to reach your long-term financial goals.

There's more good news. We have a pretty good idea of what investment returns will be over the remainder of your life, which, for the sake of simplicity, we'll call the next 40-50 years. If you are late in retirement, then most of your wealth will be left to the next generation, so this time frame still holds. If you're recently retired, you may only have 25 to 30 years left, but the conclusions don't change much. "Winning The Loser's Game" author Charles Ellis summed it up best when he said, "the average long-term experience in investing is never surprising, but the short-term experience is always surprising."

Consider the last 88 years broken down into two different, 44-year increments.

Asset Class

1928-1971 Real Returns

1972-2015 Real Returns


Cash (1-mo T-Bills)




Five-Year Bonds (5-yr T-Notes)




Long-Term Bonds (20-yr T-Bonds)




US Large Cap Stocks




US Large Value Stocks




US Small Value Stocks








"Value Premium"




Let's start with the first period, 1928-1971. All bond maturities from 30 days to 20 years had almost no return net of 2% per year inflation. You earned a small premium (1.3%) for extending out as far as five years in maturity; beyond that you took extra risk with no additional return.

And bond returns were only a small fraction of the result from stocks. Large cap, blue chip companies returned 6.6% per year after inflation, with another 0.4% and 2.4% per year available from large and small value stocks. The "value premium" (60% large value, 40% small value MINUS 100% large cap) was just 1.5% per year, a tad less than the rate of inflation.

In the second period, the most significant change was the stretch of extremely high inflation culminating with a CPI of over 13% in 1979. Over the entire period, inflation was approximately double the first period (+4.1%).

Higher inflation had an impact on real bond returns, interest rates rose considerably in the 1970s and early 1980s, and then fell drastically to the record-low rates we see today. This had almost no real impact on cash: 1-month T-bills returned +0.8% per year, close to its previous period result. Five-year maturities fared better, with a 2.7% return above inflation. Long-term bonds, of course, were the primary beneficiary of the inflation/interest rate trajectory; (as interest rates fall, bond prices rise, and the longer the maturity, the more the increase). They earned over 3% annual real returns. Yet this was still only 0.5% above shorter term, five-year maturities.

Large-cap stocks showed no net effects from the different inflation regimes. Their +6.3% annual real return was almost identical to the previous period average. Value stock returns, on the other hand, tend to run more pro-cyclically with inflation (relative to growth-oriented market indexes). This is on full display in the second period, where large value stocks returned almost 3% more than the market and small value stocks returned over 5% more. The value premium in this second period was +3.9% per year - almost exactly in line with the much higher rate of inflation.

What can truly long-term investors take from this perspective and use in their own investment efforts? A few things:

  • Bond returns, barring a period where interest rates start at exceedingly high levels, will be very low. Holding large bond allocations prior to retirement in an effort to dampen volatility comes with an extremely high opportunity cost. In retirement, holding more than a few years of future spending in bonds is risky from the standpoint of long-term purchasing power preservation. And, in all cases, owning anything other than high quality, short-term (five years or less) bonds is a terrible idea.
  • Stocks do 5% to 6% per year over inflation in the long run. This is borne out in the two sample periods, the first of which saw below-average inflation, a depression and a World War, the second of which saw above-average inflation, several wars and real estate collapses. To achieve your most important long-term goals, you need the majority of your wealth positioned to earn 5%+ real returns over time.
  • Short-term risk and relative inflation, not historical valuations, are the primary source of long-term expected returns. We cannot conclude anything different, especially with stocks, when we consider that CAPE valuation ratios on large companies were on average 25% higher in the second period (average = 20.0) than in the first (average = 15.9), yet returns were identical net of inflation.
  • Value and small cap stocks can be expected to generate higher-than-market, long-term returns because they are riskier. But that risk isn't always additive to a diversified portfolio; value and small stocks behave differently from the overall market (underperforming in the go-go 1990s, outperforming during the lost-decade 2000s).
  • Value stocks tend to be responsive to long-term inflation trends. Lower-than-average inflation tends to suppress the value premium, above-average inflation tends to be a boon to value. Considering that all of our goals should be measured in real terms, a diversified stock portfolio that includes value and small cap diversification is one of the best ways to offset the risks of unexpected inflation over time, with the additional benefit of higher long-term expected returns.
  • Capital market returns, along with modest savings and reasonable spending, should be sufficient to achieve your long-term goals. That means you don't need to try and time the markets, getting out before they drop and getting back in before they recover. For pre-retirees, this volatility is a blessing given your dollar-cost-averaging efforts. For those in retirement, as previously mentioned, a few years of spending in bonds should help you weather any market storm.
  • You also don't need to try and select individual securities or remote/opaque asset classes that will outperform. Active managers aren't endowed with any ability to beat the market. And cluttering your portfolio with complex, illiquid, hard-to-understand holdings will simply make a relatively simple effort needlessly confusing and frustrating.
  • Sticking with your plan is one of the key determinants of your absolute long-term success, and relative results. For years, independent studies have found that investors are unable to stay with their decisions in the face of market uncertainty and a powerful Wall Street marketing machine. Many advisors face similar struggles. But simply doing nothing (besides rebalancing) after implementing a well-thought-out plan should net you 1% to 2% per year higher returns than your family members, friends or neighbors with an itchy investment trigger finger.
  • This is also one of the most difficult investment practices to perform well on your own (and you're not always in the best position to see your own mistakes), which is why hiring the right financial advisor who can keep you on the straight and narrow might benefit you many times the fee they charge, and provide you much greater peace of mind in the process.

What are your thoughts? Are there issues I've failed to address? Lessons I should have included? What have you learned? Feel free to share your thoughts in the comments section below!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.