» Return to Asset Allocation Models
Most investors don't possess reliable crystal balls, which makes the future unknown and therefore uncertain.
The past, however, is known, and can serve as a useful guide which we will use here. But there are limitations.
First and foremost, the past may not be repeated.
Second, it is important to look over enough of the past to cover various economic and market conditions, yet to avoid extending so far back that you are viewing conditions that may no longer be applicable due to structural changes in the economy. It is a judgment call, and the data presented here, in Table 1, covers 1946 through 2011—the post-World War II period.
| Returns, Growth and Income for Entire Period | Stocks | Bonds | Cash |
| Average Annual Return(%) | 11.0 | 5.7 | 4.2 |
| Average Annual Return After Inflation (%) | 7.0 | 1.9 | 0.4 |
| Average Annual Growth (%) | 7.2 | 0.2 | 0.0 |
| Average Annual Income (%) | 3.8 | 5.5 | 4.2 |
| Returns (Annualized) and Losses Based on Holding Period | |||
| One-Year Holding Periods | Stocks | Bonds | Cash |
| Best Return (%) | 52.6 | 29.1 | 14.7 |
| Worst Return (%) | -37.0 | -5.1 | 0.02 |
| Percentage of Losses (%) | 22.7 | 11.6 | 0.0 |
| Percentage of Returns Below Inflation (%) | 30.4 | 39.1 | 30.4 |
| Five-Year Holding Periods Stocks Bonds Cash | |||
| Best Return (%) | 28.6 | 17.0 | 11.1 |
| Worst Return (%) | -2.4 | 1.0 | 0.1 |
| Percentage of Losses (%) | 10.8 | 0.0 | 0.0 |
| Percentage of Returns Below Inflation (%) | 23.1 | 21.5 | 26.2 |
| Ten-Year Holding Periods | Stocks | Bonds | Cash |
| Best Return (%) | 20.1 | 13.1 | 9.2 |
| Worst Return (%) | -1.4 | 1.3 | 1.1 |
| Percentage of Losses (%) | 3.3 | 0.0 | 0.0 |
| Percentage of Returns Below Inflation (%) | 16.7 | 18.3 | 25.0 |
| Twenty-Year Holding Periods | Stocks | Bonds | Cash |
| Best Return (%) | 17.9 | 10.0 | 7.7 |
| Worst Return (%) | 6.5 | 2.2 | 2.0 |
| Percentage of Losses (%) | 0.0 | 0.0 | 0.0 |
| Percentage of Returns Below Inflation (%) | 0.0 | 6.0 | 2.0 |
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Stocks: Standard & Poor’s 500 Bonds: Intermediate-Term (5-Year) Government Bonds Cash: Treasury Bills Source: "Stocks, Bonds, Bills and Inflation—2015 Yearbook," Ibbotson Associates, Chicago. |
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Lastly, it is important to understand the data itself. The stock data presented here covers the Standard & Poor's 500, which are larger, established companies. The bond data is for intermediate-term government bonds, with a maturity of about five years. Cash is represented by Treasury bills, the most conservative segment of the cash investment market. This data represents the core areas in which most investors will concentrate, but there are more volatile segments of each category—small stocks and longer-term bonds, for instance.
The data includes annual returns for the overall period, as well as annual returns based on one-, five-, 10-, and 20-year holding periods, to indicate how the risk-return equation can change with time. (These holding period returns encompass all the years using rolling holding periods. For instance, five-year periods include 1946 through 1950; 1947 through 1951; etc.). The data also indicates the percentage of holding period returns that were losses, and the percentage of holding period returns that were below the rate of inflation.
