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The U.S. stock market has long been considered to be the source of the greatest returns for investors. It’s outperformed all other types of investments over the past century including financial securities, real estate, commodities, and art collectibles.
Whether stocks are the best investment depends on the historical timeframe in which returns are studied. Choosing where to invest for the highest returns also depends on an investor’s horizons. Shorter investment periods carry greater risk due to the higher volatility of stock prices.
Key Takeaways
- The U.S. stock market is considered to offer the highest investment returns over time.
- Higher returns come with higher risk.
- Stock prices are typically more volatile than bond prices.
- Stock prices over shorter periods are more volatile than stock prices over longer periods.
- The market doesn’t get the chance to recover from the economic events and conditions that can affect prices and returns during shorter periods.
Long-Term Returns From Stocks
The stock market has produced higher gains over long periods compared to bonds. For example, $100 invested in the Standard & Poor’s 500 Index (S&P 500) in 1928 would have been worth more than $787,000 by 2023. The same $100 invested in 10-year Treasuries for the same period would have been worth around just $7,300.
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 short term. The key to capturing high returns from the U.S. stock market is to invest for the long term. Let your money remain invested while you’re waiting out short-term volatility.
The S&P 500 is far more volatile over any 12 months than a longer term. You face a greater risk of losing money during one year if you should sell. Stocks tend to fall sharply just before 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. Only a few five-year periods would have resulted in a loss in the S&P 500 between 1945 and 1995. A 10-year holding period performed even better with returns averaging about 13% and zero negative returns. The longer the holding period, the more likely you are to make money.
Treasury bonds rose in 77 of the years from 1928 to 2023. Stocks rose in 70 of those years. 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
Stocks have produced solid gains since 1999 despite the burst of the Dotcom Bubble in 2001 and the global financial crisis of 2008. The S&P 500 was nonetheless outperformed by real estate investment trusts (REITs) and gold from about 1999 through 2023.
Two REIT subgroups have outperformed the S&P 500 since 1999: Extra Space Storage Inc. with a 15.39% total return and CubeSmart with a 13.97% total return. The S&P 500 total return compares at 12.94%.
The Dow Jones Community Index Gold boasted a 7.8% annualized return average from the turn of the century through 2023. The S&P 500 had a 7% return over the same time.
These numbers point to the challenge of volatility and perhaps to the wisdom of diversification as well.
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. The U.S. also upholds an economic system that allows the business community to thrive. The returns offered to long-term investors should grow as public businesses grow.
What’s an Example of a Company With Good Historical Returns?
Warren Buffett has famously been a committed long-term investor in the U.S. stock market through his company, Berkshire Hathaway. His stock market investment choices returned an astonishing 4,384,748% from 1964 to 2023.
How Does Being a Long-Term Investor Help Build Returns?
A key to building high stock market returns is to let your portfolio weather periods of price drops due to economic events that are bound to happen over time. Portfolio values can decrease but investors won’t realize an actual loss during these periods unless they sell their investments. You allow them to recover to previous levels and grow even more in value simply by holding on to investments during rough market patches.
The Bottom Line
Historical returns can be tricky to compare because there are so many varying factors among investments. The U.S. stock market is renowned for offering high investment returns over time but stocks can also present significant risk. The best investment can depend on your risk tolerance and how long you hold onto stocks. Prices over longer periods tend to be more stable.