How Long Until You See Positive Real Returns?

Financial Wellbeing
Written By Urs Bolt

A Breakdown of Stocks, Bonds, and Savings

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When investing regularly over time, it's important to understand how long it typically takes for stocks, bonds, and savings accounts to show positive returns after accounting for inflation. Let's examine the historical performance of these asset classes in the U.S. and other major markets to determine the time horizon needed to achieve real gains.

Stocks

Over the long run, stocks have provided the highest returns compared to bonds and savings. Looking at the S&P 500 index, which tracks the performance of 500 large U.S. companies, the average annual return from 1928 to 2022 was 9.5% before inflation [3]. 

However, stocks can be volatile in the short term. The S&P 500 has suffered an average monthly decline of 1.2% in September and finished higher only 44.3% of the time dating back to 1928 [3]. Historically, the longer the investment horizon, the more likely stocks are to outperform other asset classes:

  • Over 5-year periods from 1899 to 2015, U.S. stocks outperformed government bonds 72% of the time and cash 75% of the time [4].

  • Over 10-year periods from 1899 to 2015, stocks beat bonds 79% of the time and cash 91% of the time [4].

So while stocks can be risky in the short run, regularly investing in a diversified stock portfolio for at least 5-10 years has a high probability of generating positive real returns after inflation.

Bonds

Government bonds, such as U.S. Treasuries, are considered lower risk than stocks but provide lower returns. From 1928 to 2022, long-term U.S. government bonds returned an average of 5.7% annually before inflation [3].

Bonds tend to perform best when interest rates are falling, as this causes bond prices to rise. In a low interest rate environment, the upside for bonds is limited since yields can't fall much further [1]. This dampens their ability to diversify a portfolio compared to higher yield environments.

Savings Accounts

Cash in savings accounts provides the lowest returns but also the least risk. The average annual return on U.S. savings accounts from 1928 to 2022 was just 0.2% before inflation [3]. With interest rates near zero in recent years, actual returns on cash have been negative.

In a low-rate environment, savers lose out as their purchasing power is eroded by inflation. For example, a $1,000 investment in a savings account in 2000 would have grown to just $1,032 by 2021, while inflation reduced its real value to $775 [4].

Global Perspective

Looking beyond the U.S., the MSCI World Index, which tracks stocks in 23 developed markets, returned an average of 7.6% annually from 1986-2023 [5]. The MSCI Emerging Markets index returned 8.6% over the same period [5].

In Switzerland, the SMI index of large Swiss stocks returned 6.9% per year from 1988 to 2023, while the SBI index of Swiss bonds gained 4.3% annually over that stretch [5].

So while returns vary by country and asset class, the general pattern holds – stocks provide the highest long-term returns, followed by bonds, with cash providing the lowest real returns, especially in a low-rate environment.

Conclusion

The time horizon needed to achieve positive real returns from regular investments depends on the asset class:

  • Stocks: Historically, a 5 to 10-year time horizon has been sufficient to generate real gains from a diversified stock portfolio in most cases.

  • Bonds: Government bonds have provided modest actual returns over the long run, but their performance is limited in a low-rate environment.

  • Savings: Cash savings provide the lowest returns and can lose purchasing power to inflation, especially when rates are low.

Investing regularly in a mix of stocks, bonds, and cash based on your risk tolerance and goals is vital to building wealth over time. While past performance doesn't guarantee future results, history suggests that sticking with a disciplined investment plan is the best path to achieving your financial objectives.

Urs Bolt
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