Long-Term Returns Of Different Asset Classes

Long Term Returns Of Different Asset

So, Moneystepper, what’s the best thing to invest my money in?

Being the host of a personal finance podcast, it’s inevitable that I’d receive this question. The funny thing is just how difficult it is to answer that question. However, today, I’m going to try to put one piece of the puzzle in place for you.

If we can accurately answer the question of what each type of asset class returns over the long term, this may help us make a start on determining where the best returns from our money will come.

Now, it’s essential for me to introduce of all the following information with the disclaimer that previous performance does not necessarily predict future results.

The same is true in all walks of life. As a footballing analogy, anyone predicting who would be top of the Premier League in March 2016 basing their analysis on past results would have really struggled to pick Leicester City. However, equally, predicting who is likely to be relegated this season would be remiss to ignore the results so far this season.

So, whilst it’s not a guarantee of future performance, past results are, at very least, useful to know.



Asset Class Performance

The table below shows a fair amount of information. To be completely transparent, I’ve included my source, and the date periods I have used and why. If no reason is added, I’ve taken the last 50 years of data to allow a fair comparison between as many classes as possible.

However, the key figures are in bold – the asset class and the long term average returns.

We’ve ignored millions of factors on whether this makes the investment the best or worst for you individually. We ignore leverage. We ignore volatility. We ignore risk of ruin. We don’t suggest that you ignore these things in your investment decisions, but the table below just shows the long term average returns.

Also, important to note, the returns are shown after taking inflation into account. Therefore, if the annual return in the table shows 5%, then this means that the long term return is 5% above inflation.

Right, enough covering my back! What do these average long term returns look like:

Asset Annual Return (%) Time Frame Source Other Comments
UK Property 7.8% Q4 1973 – Q4 2015 Nationwide HPI (Capital) 1973 = Start of HPI data

Capital = 3.8%

Income = 4.0%

UK Shares 5.6% Mar 1966 – Mar 2016 Barclays Equity Study Includes dividends
US Shares 5.4% Mar 1966 – Mar 2016 Dqydj.net Includes dividends
Gold 3.1% Mar 1966 – Mar 2016 Macrotrends
UK Bonds 2.9% Mar 1966 – Mar 2016 Barclays Equity Study
UK Cash 1.4% Mar 1966 – Mar 2016 Barclays Equity Study

So, UK property tops the table. However, note that this includes a 4% income return, being the return obtained from a tenant paying rent on a buy to let property. This is the only asset class of the six listed that requires any effort from the investor after making their original investment. As such, you may argue that the return is higher as you are working for that return, making some of it akin to a salary rather than true investment returns.



Could You Make More Than Average?

Yes, you certainly could. Firstly, I’ve missed out quite a large “asset class”. This isn’t typically considered to be an asset class, but I would personally consider it as a comparative investment and hence it should be considered. That is investing in a small business.

However, I’ve not put this in the table, mainly because there is no way of estimating the “average returns” from small business. It differs immensely between whether you were investing in the very early days of Facebook vs being one of the many small businesses that fail within the first few years.

Equally, there is the chance to perform better (or worse) when investing in stocks & shares. Some savvy investors can earn better returns that those averages, but this requires a lot of investment of time and effort. We summarise this up in our article: How Much Effort Should I Spend Trying To Beat The Market?

If you do intend on going down this route, then you’ll need to be right on the cutting edge of financial news and information, and sites such as Banc De Binary can help with providing the latest financial news and analysis.

The same is true with the property investment. I’m expecting comments to say that 4% return from a buy-to-let property is very poor, and that the capital gains they can earn is greater than that average by buying undervalued property. Others will say that their average returns are miles higher than tat due to leveraging their returns with mortgages. Well, yes, I agree with all of this. But, isn’t it good to know the average before you start looking at ways to beat the average?!

Now, your next step – go out and beat the average!

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