Have Stock Returns Been Too High?

It seems everything you read about investing today suggests that stock returns have been too high in recent years, and we’re overdue for a serious correction, bear market, or worse.  But have they?

From 1926-2008, the S&P 500 compounded at +9.6% per year.  If we look at the stretch from 1970-2008, which allows us to observe non-US returns, we find similar results: The S&P 500 returned +9.5% per year and the MSCI World ex-US Index did +9.7%.  Over the same period (1970-2008), the globally diversified, multi-asset class DFA Equity Balanced Strategy Index returned +13.4% annually.

Since 2009, however, returns have drifted far away from long-term averages.  The S&P 500 returned +13.1% from 2009-2018, while the MSCI World ex-US Index did only +6.8% per year (almost 3% less than its 1970-2008 average).  The DFA Equity Balanced Strategy Index did ok, returning +12.3% per year (1.1% per year less than its 1970-2008 average), but underperformed the S&P 500 after gaining almost 4% per year more during the previous four decades.

Have stock returns been too high? Probably not.  International and multi-asset class returns have actually been lower than their long-term averages since 2009.  Only large cap, blue chip US stocks have come in far above their historical returns.  Globally-diversified portfolios haven’t done poorly, they’ve just underperformed the above-average results of the S&P 500 in recent years.

Short and intermediate asset class returns tend to ebb and flow over time, sometimes higher and sometimes lower than their historical averages.  Instead of chasing recent returns or bailing out of asset classes altogether, you are better off maintaining a diversified portfolio and rebalancing periodically when individual assets deviate materially from their long-run results.  

If history is any guide, now might be one of the best times in modern history to adopt a well-diversified, balanced asset class approach to achieving your long-term goals.

*DFA Equity Balanced Strategy Index = 20% S&P 500 Index, 20% DFA US Large Value Index, 10% DFA US Small Cap Index, 10% DFA US Small Value index, 10% DJ Wilshire REIT Index, 10% DFA Int’l Value Index, 5% DFA Int’l Small Cap Index, 5% DFA Int’l Small Value Index, 3% DFA Emerging Markets Index, 3% DFA Emerging Markets Value index, 4% DFA Emerging Markets Small Cap Index, rebalanced monthly.


Past performance is not a guarantee of future results. Index and mutual fund performance includes reinvestment of dividends and other earnings but does not reflect the deduction of investment advisory fees or other expenses except where noted. This content is provided for informational purposes and should not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, products, or services.