The U.S. stock market has long been considered the source of the greatest historical returns for investors, outperforming all other types of financial securities and the housing market over the past century or so. But whether stocks are the best investment also depends on the time frame you choose to look at—and the investor's own investment horizon. Higher volatility in stock prices means shorter time periods bring greater risk.

Key Takeaways

  • The stock market has long been considered the source of the highest historical returns.
  • Higher returns come with higher risk. Stock prices are more volatile than bond prices.
  • Stocks are less reliable in shorter time periods.

Long-Term Returns From Stocks

The stock market has proven to produce the highest gains over long time periods. One hundred dollars invested in the S&P 500 in 1928 would have been worth more than $500,000 in 2019. By comparison, the same $100 invested in 10-year Treasuries would have been worth only a little more than $8,000.

Stock Holding Periods Matter

Of course, few people hold stocks for many decades—and plenty of people lose money in the market in the shorter term. The key is giving stocks time to run, meaning waiting out any shorter-term volatility.

The S&P 500, for example, is far less reliable over any 12-month period, meaning you face a greater risk of losing money. For example, stocks tend to fall sharply just prior to and during economic recessions. Time the market poorly and your losses could be painful.

The shorter the holding period, the greater the risk of losing money in the stock market.

Stretch the holding period to five years, though, and you’re more likely to make money. Between 1945 and 1995, only a few five-year periods would have resulted in a loss in the S&P 500. A 10-year holding period performed even better, with returns averaging about 13%—with zero negative returns. So the longer the holding period, the more likely you are to make money.

Stocks Versus Commodities in Recent Years

Despite the Dotcom Bubble and the Global Financial Crisis, stocks have produced solid gains over the past two decades as well. But from 1999 to 2018, the S&P 500 was outperformed by real estate investment trusts (REITs), gold, and oil. REITs gained 9.9% a year during that time period, gold 7.7% and oil 7%. The S&P 500 rose 5.6% a year.

Stocks Versus Housing

Many people consider a home an excellent long-term investment and there is good reason for that. Home prices have risen steadily over time, particularly in recent decades, dramatically so during the housing bubble. But over the longer term, the return is less impressive. Between 1890 and 2012, U.S. home prices rose 150% in real terms, meaning after accounting for inflation. That's just a fraction of the rise in the Dow Jones Industrial Average.