Morningstar’s Ibbotson division has just released its annual report on long-term investment performance. These data, which go back to the start of 1926, now track returns through 2011. Here are the annualized returns:
* Large company stocks–9.8%.
* Small company stocks–11.9.
* Long-term corporate bonds–6.1%.
* Long-term government bonds–-5.7%.
* Intermediate-term government bonds–-5.4%.
* U.S. Treasury bills–3.6%
Inflation, from 1926 through 2011, has averaged 3.0% a year.
All of the investment returns assume no transaction costs, no taxes, and reinvestment of all interest or dividends in the same type of stocks or bonds.
As you can see, riskier assets have produced higher returns over the long term. Thus, a mix of stocks and bonds is likely to produce respectable returns, with acceptable volatility. If you just stick with low-risk cash equivalents, as represented by T-bills, you can expect to barely stay ahead of inflation.