Say you’re starting to invest now. You’re patient and you make all the sensible moves. How much could you expect to make over 30 years?

With the caveat that it’s not possible to answer this question with any certainty — let’s have a stab at it.

One way to think of it is, over the long term, returns from stocks will track the size of the economy. Economic growth averages between two and three per cent in the long run, plus inflation of about two per cent means nominal returns should grow by five per cent. Add in dividend payments, and you get a long-term expected growth rate for stocks of six to seven per cent per year. 

What do the historical returns say? Professors Elroy Dimson, Paul Marsh and Mike Staunton have calculated returns for stocks, bonds and bills going back to 1900 in 23 developed markets. 

The big picture from the 20th century is that, provided a country wasn’t invaded or taken over by communists, stocks did earn six to seven per cent. The US, Australia, Canada and New Zealand all returned between 5.8 and 7.1 per cent per year on average. 

These are the countries where economic growth was least impeded. They started out relatively empty, which made it easy to grow their populations. And revolutions or wars didn’t get in the way. Indigenous populations couldn’t stop them taking resources. 

Take the US. US stocks returned an average of 6.5 per cent per year. With income reinvested, that compounded a $1 investment to $1,136 from 1900 to 2014. 

In Europe, the picture is different. Even though European economies are close in size to those of North America, New Zealand and Australia, Europe’s traumatic 20th century ruined long-run returns for the investor in European stocks. Where a $1 investment in the US in 1900 grew to $1,396 by 2014, the same investment in Germany grew to $36, France to $38, Italy $9 and Austria $1.90.

All of which is to say six to seven per cent annual returns in the long run are achievable, but they’re contingent. To match 20th century returns in the 21st century, countries will need to keep growing their economies and population at the same steady rate.And keep an eye out for communists. 


That’s stocks. In bonds, the difference between New World economies and those in Europe is even greater. All going well, a 20th century bond investor could expect to make about two per cent per year. That’s the return on US bonds. $1 invested in US bonds in 1900 compounded to $10.1 dollars in 2014 (compared to $1136 for stocks). 

Bonds are less volatile than stocks, which is why investors are willing to accept lower returns on them. The following chart shows a ten-year average of bond and stock returns in the US since 1938. Though bond returns are clearly lower than those of stocks, note how much smoother they are. 

So bond returns are meant to be modest, but smooth. Stock returns are meant to be generous, but jumpy. The weird thing is that since 1980, bond returns have actually exceeded stock returns. It’s unprecedented. 

Something strange has happened to all asset markets since about 1980. All assets have gotten much more expensive relative to the income they generate. Everything from US Government bonds to corporate bonds, house prices, bank deposits and stocks. And bond investors have benefited most.

In other words, a stock, bond or house that generated an income stream of €1,000 per year might have cost €10,000 in 1980. But in 2020 that same income stream might cost €50,000. 

What this means is that 2020 isn’t a historically promising time to start investing. Assets of all kinds are almost as expensive as they’ve ever been, relative to the income they generate. 

Why is everything expensive? Nobody’s quite sure, but it’s probably something to do with a glut of savings that’s appeared over the last few decades. Over the last thirty years the baby boomers entered their peak earning and saving years. Simultaneously, half a billion middle-class Chinese arrived on the scene. And the Chinese save more than westerners. All those savers are chasing after assets, driving up their price and driving down their yield. 

Timing matters

One more thing. I recommend stocks for the long run. As we’ve seen, stocks have comfortably the best returns — at the cost of being more volatile. That makes them a good asset to hold for the long term.

We’ve also seen that stocks return around seven per cent per year. After 30 years, a €100 investment in stocks at seven per cent gets €761.

But, given the way stocks bounce around, you’re not guaranteed to make €761 even if stocks average seven per cent returns. Volatility plays a big role in determining what you actually get.

That’s because returns are much more useful to you early in your investing career than later. Early returns compound over time. 

The average return of €761 masks a wide range of possible outcomes. If you’re very unlucky and you endure a few big market crashes early in your investing career, that can hobble your 30-year returns. Equally if you get lucky early on, that gives you a strong base which will compound over time. 

Given a 20 per cent standard deviation (a measure of volatility), and seven per cent average returns, there’s about a 9 per cent chance an investor will lose money over time, according to an analysis by economist Alex Tabarrok. Indeed, 69 per cent of investors earn less than the €761 average. 

The lucky investors, by comparison, do very well. With a seven per cent average return, an investor can make as much as €25,000 from his original €100 investment if the good years happen to arrive just at the right time. 

Professors Dimson, Marsh and Staunton’s research looks at the very long term. But an investor starting out today wants to know the prospects for results over 30 years, not 114. 

Dimson, Marsh and Staunton’s seven per cent per year from stocks in developed stable economies looks like the ceiling of what’s achievable.

While seven per cent average returns from stocks are not totally unrealistic, they’re not the most likely outcome. It makes sense to somewhat lower your expectations. That's not to say you should invest less, or invest differently. Just that your compounded returns might not match the golden age of mid-century American capitalism.