Stocks historically outperform bonds in the long term, but come with higher risk of drawdowns

From Yahoo Finance: 2025-04-20 15:18:00

Financial markets are experiencing major volatility with wild swings in stock, bond, and commodity prices globally. The U.S. dollar is devaluing rapidly against foreign currencies due to potential tariffs impacting supply chains. Changing policies from the Trump administration add to the chaos.

Investors are questioning their strategies amidst heightened price movements and stock drawdowns. Historical data shows U.S. stocks have a 10% annual return over 100 years, making them a strong long-term investment despite inflation adjustments.

Compound interest in stocks can lead to significant growth, with $10,000 yielding almost $13 million in 50 years at a 10% average annual return. However, the risk of market drawdowns, with 27 instances of over 20% drops in the S&P 500 since 1928, remains a concern.

For short-term cash needs, a mix of bonds can maintain purchasing power. Bonds historically offer lower returns than stocks, with U.S. Treasury bonds averaging 5% annually over the past century. Bonds experience less severe drawdowns, making them suitable for near-term expenses.

Investors should consider their personal financial situation when deciding between stocks and bonds. Stocks outperform bonds historically but come with higher drawdown risks. Bonds provide steadier returns with less volatility, making them ideal for short-term savings goals like a home down payment or retirement spending.

Deciding between stocks and bonds should be based on long-term financial planning rather than short-term performance predictions. Personal factors like age, upcoming expenses, and retirement goals should guide the allocation of stocks and bonds in an investment portfolio. Focus on long-term stability over short-term gains.

The Motley Fool Stock Advisor team identified 10 top stocks to buy now, excluding the S&P 500 Index. Historical returns show significant gains from past recommendations like Netflix and Nvidia, with Stock Advisor’s total average return outperforming the S&P 500 by 792%. Join Stock Advisor for the latest top stock picks.



Read more at Yahoo Finance: Should You Be Invested in Stocks or Bonds Right Now? Here’s What History Says.