What's The Really Long-Term Return On Stocks?

by: Eric @ SERVO

Stocks should make up the majority of most long-term investors' portfolios.

Diversification across asset classes, which almost no one gets right, is essential for the long-term success of a stock portfolio.

By looking at stock market returns across different global markets and time periods, we can better understand what the true long-term return of stocks is and what patterns emerge within.

Historical stock market data and durable return patterns should serve as the basis for all long-term planning and investing decisions.

In a recent article, I discussed the virtues of a significant long-term allocation to stocks for all investors - not just pre-retirees, but those in retirement as well. Central to the premise of the article was the emphasis on diversification within stocks, a concept that I find many people still don't fully understand or embrace.

Of course, you want to hold a lot of stocks within a given asset class, but the primary focus should be on the overall asset allocation and a broadly diversified portfolio. Different asset classes have had remarkably different long-term returns, and the pattern of returns have been remarkably consistent across different markets and time periods. This is information you absolutely must understand to be a successful investor, not to mention information that is incredibly difficult to come by. So let me outline what the really long-term return on stocks has been.

First, we have quality data on US stocks going back to 1928.

Asset Class

Annualized Returns

US Large Cap Stocks


US Large Value Stocks


US Small Cap Stocks


US Small Value Stocks


Large cap stocks have produced returns of +9.5% per year, the source of the oft-repeated comment that stocks "do about 10% a year." But ignoring value and small cap stocks understates long-term returns. Large value stocks returned +11.3% a year, small cap stocks did +12.2% a year, and small value stocks +13.5%.

US stock returns have been good, for sure. Almost no one denies that. What we do hear is that the US market has been the "winner" amongst the rest of the world, and non-US market returns have been far lower. International (Europe and Asia) data isn't available until 1970 for large cap stocks and 1982 on small value stocks (and we'll get there), but we can first look at the returns on UK stocks dating back to 1956:

Asset Class

Annualized Returns

UK Large Cap Stocks


UK Large Value Stocks


UK Small Cap Stocks


UK Small Value Stocks


Looking at the returns on UK stocks over the last 60+ years, we don't find that the US evidence overstates results, but understates them! UK large cap stocks were within range of US returns - +10.2% vs. +9.5%, but UK large value, small cap, and small value returns were all 2% to 3% per year higher. And the pattern of returns was the same: Large value beat large cap, small beat large, and small value beat small cap. Coincidence based on random outcomes from the two largest stock markets of the last century? Let's keep looking to find out.

As I mentioned before, we can measure international developed large cap stocks since 1970 (+9.3% a year - only 0.2% per year less than the return on US stocks from 1928-2016), but to pull in all four corners of the international market, we need to measure returns since 1982:

Asset Class

Annualized Returns

International Large Cap Stocks


International Large Value Stocks


International Small Cap Stocks


International Small Value Stocks


This is an interesting outcome. We're looking at about 35% of the world market (the US makes up about 55%), over a period of time that is fairly long but completely different from the US example. And, yet, asset class returns are almost identical. Int'l large cap stocks returned +9.0% per year, int'l large value stocks did +11.4%, int'l small cap stocks did +11.6% and international small value stocks did +13.6%. Think about this for a minute - international large and small value stocks over the last quarter century have generated returns within 0.1% a year of US stocks from 1928-2016. At some point, we have to stop thinking this is noise and realize we're seeing the signal.

If you did the math, however, you realized that US and non-US developed markets only comprise about 90% of the world market. There's another 10% to account for, and those are emerging markets. The data on emerging market stocks only dates back to 1989, but we can measure returns sorted along large/small and value stock dimensions. What do we find?

Asset Class

Annualized Returns

Emerging Markets Large Cap Stocks


Emerging Markets Value Stocks


Emerging Markets Small Cap Stocks


Clearly, you either think I'm making these numbers up (I'm not, trust me), or the outcomes are just eerie. Emerging markets large cap stocks returned +9.6% per year (0.1% per year more than US large cap stocks since 1928). Emerging markets value stocks (large cap and small cap combined) returned +13.2%, and emerging markets small cap stocks returned +11.4%. Each one of these results is what you would have predicted had you only looked at developed markets over their longest available periods. About 10% stock returns, value beat growth, and large cap beat small cap, by very familiar amounts.

Suffice it to say, at this point, we are buried by the historical data on long-term stock returns, and it all lines up exactly as you would expect: Large cap stocks return 9% to 10% a year over time, large value stocks do 1% to 2% more, small cap stocks 2% or so more, and small value stocks about 4% per year more.

These figures should be the basis for your long-term investment planning decisions. They should also provide you the conclusive evidence why simply holding a basket of large cap stocks, or just US stocks, is insufficient. All individual asset classes can go extended periods with poor returns, an outcome that can be offset by diversifying across different asset classes. They're different because they don't go up/down at the same time. And ignoring smaller and more value-oriented stocks will cost you several percent a year in missed-out-on returns.

Of course, you may wish to knock a few percent off all future returns for planning purposes, if for no other reason than conservative plans are usually more successful plans. But not because stocks are "overvalued." We'll debunk that myth tomorrow. For today, the takeaway is that there's been a very clear and dependable pattern in global stock market returns: They've been good, and the smaller and more value-oriented the asset class, the better the results have been.


Source of data: DFA Returns Web


US large cap = DFA US Large Cap Index

US large value = DFA US Large Value Index

US small cap = DFA US Small Cap Index

US small value = DFA US Small Value Index

UK large cap = MSCI UK Index

UK large value = DFA UK Large Value Index

UK small cap = DFA UK Small Cap Index

UK small value = DFA UK Small Value Index

Int'l large cap = MSCI EAFE Index

Int'l large value = DFA Int'l Large Value Index (FF Int'l Value Index prior to 1990)

Int'l small cap = DFA Int'l Small Cap Index

Int'l small value = DFA Int'l Small Value Index

EM large cap = MSCI EM Index

EM value = DFA UK Large Value Index

EM small cap = DFA UK Small Cap Index

Past performance is not a guarantee of future results. Index performance shown includes reinvestment of dividends and other earnings but does not reflect the deduction of investment advisory fees or other expenses except where noted. This content is provided for informational purposes and is not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, products, or services.

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.