When it comes to investing, two primary categories are equity and fixed income. Each has its own risk and return profile. Below, we will examine the historical returns of these asset classes using real data to provide clarity.
Equity investments, commonly known as stocks, represent ownership in a company. Historically, equities have offered higher returns compared to fixed income but come with increased volatility. Here are a couple of examples:
S&P 500 Index: Over the past 90 years, the average annual return of the S&P 500, a benchmark for U.S. equities, has been approximately 10%. This figure includes periods of significant growth as well as downturns, like the 2008 financial crisis.
Example Year: In 2019, the S&P 500 provided a return of 28.88%, showcasing the potential for high returns in a strong economic environment.
Fixed income investments typically include bonds and are known for generating regular income through interest payments. While these investments are generally considered safer, they usually yield lower returns compared to equities. Here are some examples:
U.S. Treasury Bonds: Historically, long-term U.S. Treasury bonds have returned about 5% annually over the last several decades. This is a reliable but lower return compared to equities.
Example Year: In 2020, the average return on a 10-year Treasury bond was approximately 0.9%. This highlights how fixed income can provide stability but may not keep pace with inflation or equities during strong market conditions.
To better understand the differences in historical returns, consider the following table:
| Year | S&P 500 Return | U.S. Treasury Bond Return |
|---|---|---|
| 2017 | 19.42% | 2.31% |
| 2018 | -6.24% | 0.01% |
| 2019 | 28.88% | 6.87% |
| 2020 | 16.26% | 0.9% |
| 2021 | 26.89% | -0.03% |
In summary, while equities have historically offered higher returns, they also come with greater risk and volatility. On the other hand, fixed income investments provide stability and regular income, but often at the cost of lower returns. Understanding these historical trends can help you balance your investment portfolio according to your risk tolerance and financial goals.