To say that stocks, historically, have returned approximately 10% per year, bonds 5.5% and cash 3.4% is really just telling half the story.
In that same half-story, if you invest $100,000 for 10 years, stocks would grow to $259,000, which I’d grade A+. Bonds would grow to $170,000; let’s give it a solid B. Finally, cash ends up at almost $140,000 — a C+.
The other half of the story? Taxes and inflation.
After taxes and inflation, according to Morningstar research, the same historic figures become 5.1% for stocks, 0.6% for bonds and -0.8% for cash. This is what makes it hard for me to argue against stocks for the long run.
I know, percentages don’t quite grab the imagination, but dollars might.
So, here, then, assuming average return over the next 10 years, is the full story: Investing the same $100,000, stocks would be worth $164,000; bonds would crawl their way to $106,000; and that safe cash pile drifts backwards to $92,000.
Suddenly, my grades become B, C- and D, respectively. (F almost would require a total loss.)
To reiterate, these subjective grades apply only to long-term investing, like 10 years or longer. For near-term investing needs, fixed income like bonds and cash may be excellent choices.
Some critics will point out that high current stock valuations and low interest rates make it unlikely we’ll see average returns in the intermediate future. Well, they might be right — and they might be wrong. Still, it really doesn’t alter the choice between stocks, bonds and cash.
They’re just telling us to lower our expectations.
Either way, for long-term investing, once you allow for taxes and inflation, history strongly favors stocks over bonds and cash.
In the end, it’s not what you make that matters, but what you keep.