There are a couple of reasons why the average annual stock return figures can be deceptive. The first regards how the average is calculated. If a simple average is used it can be quite different than your actual return. Here is an example of this idea. If you invested in a stock and it went up 100% one year and down 50% the next you would have an average return of 25% but your actual return would be zero because you would just have the same amount of money that you initially invested.
The 10% annual return figure is also deceptive. It takes a long time period before stock returns average out to around 10%. According to this article at Fool.com over the 40 year period from February 1969 to February 2009 stocks had an annual return of 5.3%. That is a pretty long period for stocks to not return the average 10%. The article is a discussion of a study by Rob Arnott showing bonds outperforming stocks over 40 years. It also shows that starting at any time from 1980 up to 2008, an investor in 20-year treasuries, rolling them over every year, beats the S&P 500 through January 2009. This data may have been cherry-picked to show bonds in the best possible light but it still shows that it is possible for bonds to beat stocks over the long term.
One other complaint I have about the average 10% stock return figure is that after writers have gone to great lengths to show how stocks average 10% over the long term they will state that past performance is no guarantee of future results. This seems a little disingenuous when their article implies the opposite.
My point isn’t that you shouldn’t invest in stocks or that you should invest in bonds over stocks. My point is that stocks are not quite as great an investment as they are made out to be and also that keeping a portion of your portfolio in a fixed-rate investment doesn’t guarantee lesser returns.
I do own stocks and I plan to continue to invest in them. However, if I could find a guaranteed investment of 8% or more I’d definitely invest in that.
I do
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Would you invest in a guaranteed investment yielding 4%
Most of my cash is in a reward checking account that pays 5%. I do have a little bit of money in lower paying accounts mainly to be eligible for referral bonuses. When you add the bonuses the lower paying accounts actually pay quite well.
A guaranteed 4% isn’t too tempting to me.