If you want to build an investment portfolio that’ll help you grow your wealth, then the construction of a house is a good example of the process that’s involved. You see, before you build a house, don’t you think it would help if you know the about the materials that are available to you?
If you agree, then when it comes to investing, your main building materials are stocks and bonds. And as such, it’s a good idea to spend some time studying their history.
“Why?” you ask.
Because financial history gives us invaluable wisdom about the nature of the stock and bond markets. For that reason, then, careless investors will ignore these records at their own expense. Wise investors, on the other hand, will embrace these records and use them for their own benefit.
You see, although you can’t precisely predict future returns by studying financial history, having a knowledge of the past allows you to get a sense of the financial risk you face in the here and now. In other words, returns are uncertain. But risks, at the very least, can be somewhat controlled.
Now, before we get into the history of stock and bond returns, let’s briefly talk about the difference between bonds and stocks.
First of all, a bond is simply a loan. As such, bonds have an extremely limited upside. You see, the best you can do is collect interest payments, along with the original amount of your loan at the time of its maturity.
A share of stock, on the other hand, represents a claim on all the future earnings of a company. And because of that, stocks have a potentially unlimited upside.
Okay. With that said, let’s dig into the history of stock and bond returns.
We’ll begin by looking at the Vanguard Total Stock Market Index Fund Investor Shares (VTSMX). This fund, which was designed to track the performance of the CRSP US Total Market Index, was first offered in April 1992. Here are the annual returns:
| 1993 | 10.62% |
| 1994 | -0.17% |
| 1995 | 35.79% |
| 1996 | 20.96% |
| 1997 | 30.99% |
| 1998 | 23.26% |
| 1999 | 23.81% |
| 2000 | -10.57% |
| 2001 | -10.97% |
| 2002 | -20.96% |
| 2003 | 31.35% |
| 2004 | 12.52% |
| 2005 | 5.98% |
| 2006 | 15.51% |
| 2007 | 5.49% |
| 2008 | -37.04% |
| 2009 | 28.70% |
| 2010 | 17.09% |
| 2011 | 0.96% |
| 2012 | 16.25% |
| 2013 | 33.35% |
| 2014 | 12.43% |
| 2015 | 0.29% |
| 2016 | 12.53% |
| 2017 | 21.05% |
| 2018 | -5.26% |
| 2019 | 30.65% |
| 2020 | 20.87% |
| 2021 | 25.59% |
| 2022 | -19.60% |
| 2023 | 25.89% |
| 2024 | 23.61% |
Now, let’s see what this means in terms of actual dollars. If you invested $1,000 at the start of 1993 and simply held on to your investment, here’s how your money would’ve grown over the years:
| 1993 | $1,106 |
| 1994 | $1,104 |
| 1995 | $1,500 |
| 1996 | $1,814 |
| 1997 | $2,376 |
| 1998 | $2,929 |
| 1999 | $3,626 |
| 2000 | $3,243 |
| 2001 | $2,887 |
| 2002 | $2,282 |
| 2003 | $2,997 |
| 2004 | $3,372 |
| 2005 | $3,574 |
| 2006 | $4,128 |
| 2007 | $4,355 |
| 2008 | $2,742 |
| 2009 | $3,529 |
| 2010 | $4,132 |
| 2011 | $4,172 |
| 2012 | $4,850 |
| 2013 | $6,467 |
| 2014 | $7,271 |
| 2015 | $7,292 |
| 2016 | $8,206 |
| 2017 | $9,933 |
| 2018 | $9,410 |
| 2019 | $12,295 |
| 2020 | $14,861 |
| 2021 | $18,663 |
| 2022 | $15,005 |
| 2023 | $18,890 |
| 2024 | $23,350 |
As you can see, if you invested $1,000 at the start of 1993 and simply held on to your investment, you would’ve ended up with $23,350 at the end of 2024.
Okay. Next, let’s look at the Vanguard Total Bond Market Index Fund Investor Shares (VBMFX). This fund was designed to track the performance of the Bloomberg U.S. Aggregate Float Adjusted Bond Index. Here are the annual returns for the same period:
| 1993 | 9.68% |
| 1994 | -2.66% |
| 1995 | 18.18% |
| 1996 | 3.58% |
| 1997 | 9.44% |
| 1998 | 8.58% |
| 1999 | -0.76% |
| 2000 | 11.39% |
| 2001 | 8.43% |
| 2002 | 8.26% |
| 2003 | 3.97% |
| 2004 | 4.24% |
| 2005 | 2.40% |
| 2006 | 4.27% |
| 2007 | 6.92% |
| 2008 | 5.05% |
| 2009 | 5.93% |
| 2010 | 6.42% |
| 2011 | 7.56% |
| 2012 | 4.05% |
| 2013 | -2.26% |
| 2014 | 5.76% |
| 2015 | 0.30% |
| 2016 | 2.50% |
| 2017 | 3.46% |
| 2018 | -0.13% |
| 2019 | 8.61% |
| 2020 | 7.61% |
| 2021 | -1.77% |
| 2022 | -13.25% |
| 2023 | 5.60% |
| 2024 | 1.14% |
And in terms of actual dollars, if you invested $1,000 at the start of 1993 and simply held on to your investment, here’s how your money would’ve grown over the years:
| 1993 | $1,097 |
| 1994 | $1,068 |
| 1995 | $1,262 |
| 1996 | $1,307 |
| 1997 | $1,430 |
| 1998 | $1,553 |
| 1999 | $1,541 |
| 2000 | $1,717 |
| 2001 | $1,861 |
| 2002 | $2,015 |
| 2003 | $2,095 |
| 2004 | $2,184 |
| 2005 | $2,236 |
| 2006 | $2,332 |
| 2007 | $2,493 |
| 2008 | $2,619 |
| 2009 | $2,775 |
| 2010 | $2,953 |
| 2011 | $3,176 |
| 2012 | $3,305 |
| 2013 | $3,230 |
| 2014 | $3,416 |
| 2015 | $3,426 |
| 2016 | $3,512 |
| 2017 | $3,633 |
| 2018 | $3,629 |
| 2019 | $3,941 |
| 2020 | $4,241 |
| 2021 | $4,166 |
| 2022 | $3,614 |
| 2023 | $3,816 |
| 2024 | $3,860 |
So, if you invested $1,000 at the start of 1993 and simply held on to your investment, you would’ve ended up with $3,860 at the end of 2024.
Now, as the data shows, stocks have provided higher returns than bonds. And to be more specific, combining all of its returns above, over the past 32 years, from 1993 to 2024, the Vanguard Total Stock Market Index Fund Investor Shares has grown at an average rate of 10.35% each year.
To compare, by also combining all of its returns above, over the same time period, the Vanguard Total Bond Market Index Fund Investor Shares has grown at an average rate of 4.31% each year.
Alright. We’ve now gone over the history of stock and bond returns. However, the study of investment returns is only half of the story.
You see, when you break it down to its core, investing is the art of earning a return on your money in exchange for taking on risk. And risk can be thought of as your chance of losing money.
Now, when we talk about risk, there are actually two types: short-term and long-term. Here, though, to keep things simple, we’ll mainly deal with short-term risk.
So, in looking at the record above, over the 32-year period, stocks lost money in 7 of those years. In other words, stocks lost money about once every 4 years. And the toughest year was 2008, when it lost 37% of its value.
Over the same time period, bonds lost money in 6 of those years. In other words, bonds lost money a bit less often than stocks, or about once every 5 years. The toughest year was 2022, when it lost 13% of its value, which is considerably less than the most challenging year for stocks.
So, the history of the stock and bond markets shows that risk and reward go hand in hand. In other words, if you expect safety, you’ll likely have to settle for lower returns. And if you want to achieve high returns, you should be prepared to embrace short-term risk and take it in stride.
However, in the long run, short-term risk ultimately fades away in importance. After all, if you can achieve significantly higher returns over the long term, does it make a big difference if you’ve lost about 40% of your money along the way?