stocks

What’s the best long-term investment? Because you’re a money nerd (and a GRS reader), I hope your answer to this question was, “Stocks!” If the future is anything like the past, that’s the correct answer. History has shown that stocks are the best long-term investment — and by a wide margin.

Unfortunately, most Americans believe otherwise.

As a part of its annual Economy and Personal Finance survey (conducted during the first two weeks of April), Gallup News asked 1017 American adults, “Which of the following do you think is the best long-term investment: bonds, real estate, savings accounts or CDs, stocks or mutual funds, or gold?”

Here’s how people answered:

• 35% of respondents said that real estate is the best-long term investment
• 21% said that stocks or mutual funds are the best long-term investment
• 17% said that savings accounts or certificates of deposit are the best long-term investment
• 16% said gold is the best long-term investment
• 8% said bonds are the best long-term investment

While acknowledging that past results are no guarantee of future performance — let’s take a look at why I think Americans haven’t got a clue when it comes to figuring out the best long-term investment strategy.

The Rate of Return on Everything

The August 2019 issue of The Quarterly Journal of Economics included a paper entitled “The Rate of Return on Everything, 1870-2015”. Over an astounding 74 pages of discussion, the authors attempt to analyze the long-term (145-year) rate of return on a variety of assets around the world.

The paper examines four popular investment vehicles:

• Bills, by which the authors mean Treasury bills, are short-term government bonds. At present, these are a good proxy for the rates you can earn with a high-yield savings account. (I don’t think this is always the case, though.)
• Bonds, which in this case refers to ten-year government bonds (such as a 10-year Treasury note).
• Equity, which is another way to describe common stock. Here, the authors are measuring overall stock market performance.
• Housing, including rental properties.

We’ll look at each of these in greater detail in a moment (and we’ll look at gold too), but for now let’s look at this paper’s overall findings. While the authors looked at data for many countries, I’m only going to share results for the U.S. The following table shows the rates of return for these different asset classes over three different time periods. (Remember that, for our purposes, Bills are a stand-in for savings accounts.)

From this table, it’s clear that equities (i.e., stocks) have been the highest return investments over long periods of time. Nothing else comes close. (Outside the U.S., this isn’t always true.)

Now, while stocks provide the best long-term returns, they also come with the greatest volatility. Here’s a a chart (Figure VII) from the paper that shows just how crazy the ride with stocks can be. (Also note how closely equities and real estate tracked each other until the Great Depression.)

It’s this volatility that scares so many people away from the stock market. They’re afraid that a sharp decline can come at any time. And that’s true. But what’s also true is that a prolonged bull market can occur at anytime, as we experienced from March 2009 to February 2020! If you’re a long-term investor, you don’t give a fig about short-term market movement.

Let’s dive deeper into the long-term investment returns provided by the asset classes in the Gallup poll: real estate, stocks, savings accounts, gold, and bonds.