Retirement plan decisions made easy
Drill Down: Returns of Different Types of Assets
So just how much money can you make investing in different types of assets? It’s easy to throw one’s hands up in the air and say that there’s no telling. If you are going to invest in a stock, it is hard for me to know whether you are going to invest in the stock that goes through the roof or one that’s trying to go through the floor.
I take a somewhat agnostic view about the specific investments and simply say, if your stock investments are about average, how will they do? If your choice of bonds is about average, how will they do? And so forth for the major asset classes.
Here are average returns since 1972. You will see slightly different figures if you measure average returns over a different time period.
| Asset Class | Return | Risk |
| Treasury Bills | 6.1% | Low |
| Bonds | 8.5% | Moderate |
| Small Cap Stocks | 13.4% | High |
| Large Cap Stocks | 11.4% | High |
| International Stocks | 10.9% | High |
| Real Estate | 14.1% | Moderate |
Treasury Bills
Treasury bills are your safest possible investment. They are secure enough that professional investors often refer to them as “cash” because they are almost as safe as holding cash.
Bonds
Bonds are long-term debts. In the case above, I’m showing the debt of the United States Treasury. The bonds are like Treasury Bills, except for maturity. Treasury Bills have a life of three to 12 months whereas Treasury Bonds have lives of one to 30 years. The risk from Treasury Bonds does not come from the possibility that the United States Treasury will fail to pay its debts; instead, the risk comes from changes in interest rates. When interest rates go up, the price of old bonds, that pay the old, lower interest rate, goes down. So your Treasury Bond may drop in value during the time that you own it, even though the Treasury’s promise to repay the bond in full is good as gold.
Stocks
Stocks can be divided between “small cap” and “large cap” stocks. “Cap” is short for capitalization it refers to the company’s size. Capitalization is determined by the number of shares outstanding multiplied by the price of the shares. Another way to think of it is how much you would have to pay to own the entire company.
Large cap stocks have capitalizations of several billion dollars. Small cap stocks have capitalizations of less than one billion. (Different people divide stocks differently. Some like to create another category called “mid-cap” for companies midway between small and large. The bottom line is that small cap stocks offer higher returns, on average, but with more risk than large cap stocks.)
Stocks can also be divided between growth and value stocks. Growth stocks tend to have prices that are high compared to their earnings, dividends, sales and assets. The high prices reflect optimism about these companies’ prospects. Value stocks, in contrast, tend to be priced fairly low relative to the size of the company, because few investors expect strong growth from them. However, value stocks offer good investment opportunities simply because they can be bought fairly cheaply.
Foreign stocks, which can include both developed countries (such as Germany) and emerging markets (such as China), also tend to offer high returns with high risk.
Real Estate
Real estate as listed above refers to the type that large investors buy, such as office buildings, shopping malls, and large apartment complexes. As the table shows, real estate investments offer the possibility of a high return without quite as much risk as the stock investments.
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Lesson 1: What the Heck is a 401k, and What’s So Great About It?
Lesson 2: Contributions to Your 401k
Lesson 3: Investments “Cook Book” Approach
» Lesson 4: Investments: How Investments Work
Lesson 5: Loans and Hardship Withdrawals from Your 401k
Lesson 9: Your 401k, Your Other Assets, and Your Life
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