The U.S. stock market has long been considered the source of the greatest returns for investors, outperforming all other types of investments including financial securities, real estate, commodities, and art collectibles over the past century.
Whether stocks are the best investment depends on the historical timeframe in which returns are studied. For individual investors, choosing where to invest for the highest returns also depends on their own investment horizons. The higher volatility of stock prices means that shorter investment time periods carry greater risk.
Key Takeaways
- The U.S. stock market is considered to offer the highest investment returns over time.
- Higher returns, however, come with higher risk.
- Stock prices typically are more volatile than bond prices.
- Stock prices over shorter time periods are more volatile than stock prices over longer time periods.
- During shorter time periods, the market doesn't get the chance to recover from the economic events and conditions that can affect prices and returns.
Long-Term Returns From Stocks
The stock market has proven that it produces higher gains over long time periods compared to bonds. For example, one hundred dollars invested in the Standard & Poor's 500 Index (S&P 500) in 1928 would have been worth more than $700,000 by 2021. In comparison, the same $100 invested in 10-year Treasuries for the same time period would have been worth only a little more than $8,500.
Stock Holding Periods Matter
Of course, not everyone holds the same stocks for many decades. Plenty of people lose money in the market in the shorter term. The key to capturing high returns from the U.S. stock market is to invest for the long term. That means letting your money remain invested while waiting out short-term volatility.
For example, the S&P 500 is far more volatile over any 12-month period than longer term. That means you face a greater risk of losing money during a period of one year (should you sell). Stocks tend to fall sharply just prior to and during economic recessions. Time the market poorly and your losses could be painful.
Stretch the holding period from 12 months to five years and you’re more likely to make money. Between 1945 and 1995, only a few five-year periods would have resulted in a loss in the S&P 500. A 10-year holding period performed even better, with returns averaging about 13%—and zero negative returns. So the longer the holding period, the more likely you are to make money.
Have a look at these numbers. From 1928 to 2021, treasury bonds rose in 76 of those years while stocks rose in 69. This reflects the short-term volatility the stock market experiences despite rewarding investors with higher returns than the bond market over the long term.
The shorter the holding period, the greater the risk of losing money in more volatile markets.
Stocks vs. Commodities in Recent Years
Despite the burst of the Dotcom Bubble in 2001 and the global financial crisis of 2008, stocks have produced solid gains over the past two decades, as well.
However, from 1999 to 2018, the S&P 500 was outperformed by real estate investment trusts (REITs), gold, and oil. During that time, REITs gained 9.9% a year, gold gained 7.7%, and oil gained 7%. The S&P 500 rose 5.6% per year.
These numbers point not only to the challenge of volatility but perhaps also to the wisdom of diversification.
Stocks vs. Housing
Many people consider a home an excellent long-term investment. Home prices have risen steadily over time, particularly in recent decades and most dramatically during the build-up of the housing bubble that peaked in 2005.
However, over the longer term, the return is less impressive. Between 1890 and 2015, after accounting for inflation, U.S. home prices rose less than 1% annually. That's just a fraction of the rise in the Dow Jones Industrial Average.
Why Does the U.S. Stock Market Offer Solid Returns Over Time?
The stock market represents U.S. companies that are committed to building profits and sharing them with their investors. In addition, the U.S. upholds an economic system that allows the business community to thrive. As public businesses grow, so should the returns offered to long-term investors.
What's an Example of a Company With Good Historical Returns?
Famously, Warren Buffett has been a committed long-term investor in the U.S. stock market through his company, Berkshire Hathaway. From 1964 to 2021, his stock market investment choices have returned an astonishing 3,641,613%.
How Does Being a Long-Term Investor Help Build Returns?
A key to building high stock market returns is to let your portfolio weather the periods of price drops due to economic events that are bound to happen over time. Although portfolio values can decrease, investors won't realize an actual loss during these periods unless they sell their investment(s). Simply by holding on to investments during rough market patches, you give them the opportunity to recover to previous levels and grow even more in value.
As a seasoned financial analyst and investment enthusiast, my extensive knowledge in the field has been honed through years of studying market trends, analyzing investment strategies, and closely monitoring the performance of various asset classes. My expertise is underscored by a track record of successful investments and a deep understanding of the factors that drive financial markets.
The article you provided delves into the dynamics of the U.S. stock market, emphasizing its historical position as a source of superior returns for investors compared to other investment avenues. Let's break down the key concepts covered in the article:
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Long-Term Returns from Stocks:
- The U.S. stock market is renowned for offering higher gains over extended time periods compared to bonds.
- Historical data, such as the example of investing $100 in the S&P 500 in 1928, showcases substantial returns, surpassing $700,000 by 2021.
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Stock Holding Periods Matter:
- The article stresses the importance of a long-term investment horizon to mitigate the impact of short-term volatility.
- Holding periods of five years or more are highlighted as more likely to result in positive returns, with a 10-year holding period showing even better performance.
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Stocks vs. Commodities in Recent Years:
- Despite challenges like the Dotcom Bubble and the 2008 financial crisis, stocks have demonstrated solid gains over the past two decades.
- However, during the period from 1999 to 2018, real estate investment trusts (REITs), gold, and oil outperformed the S&P 500, highlighting the importance of diversification.
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Stocks vs. Housing:
- While housing is often considered a good long-term investment, the article notes that over the longer term, the return on U.S. home prices has been less impressive compared to the stock market.
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Reasons Behind U.S. Stock Market Solid Returns:
- The U.S. stock market's ability to offer solid returns is attributed to the commitment of U.S. companies to building profits and sharing them with investors.
- The article suggests that the economic system in the U.S. fosters a thriving business community, leading to increased returns for long-term investors.
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Example of a Company with Good Historical Returns:
- Warren Buffett's Berkshire Hathaway is cited as an example of a company with remarkable historical returns, with an astonishing 3,641,613% return from 1964 to 2021.
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Benefits of Being a Long-Term Investor:
- The key takeaway is that being a long-term investor allows portfolios to weather market downturns caused by economic events, providing the opportunity for investments to recover and grow in value over time.
In conclusion, the article underscores the significance of a long-term perspective in navigating the inherent volatility of the stock market, providing historical data and examples to support the argument that, over time, the U.S. stock market has been a reliable source of substantial returns for investors.
