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Not investment advice. Educational reading. See Disclaimer.
L.2 · BEGINNER · 2 MIN

Stocks vs Bonds vs Cash: The Numbers

Asset allocation is a tradeoff, and to make it well you need the actual numbers behind 'stocks grow faster but bonds are steadier.' Over the long run in the US (the Ibbotson SBBI dataset, 1926-2023), stocks have returned roughly 10% per year before inflation, bonds roughly 5%, and cash (Treasury bills) roughly 3% -- but the steadier the asset, the smaller the gut-wrenching drops along the way. Higher expected return is paid for with bigger swings; there is no high return without higher risk.

Quiz · 5 questions ↓

Long-run returns and worst-case drops

Asset classLong-run return per year (before inflation)Worst-case drop to expect
Stocks (US total market)About 10%Down 50%+ in a severe crash (2008)
Bonds (investment-grade)About 5%Down ~15% in a bad year (2022)
Cash / Treasury billsAbout 3%No drop, but inflation slowly erodes it

These are long-run averages, not promises

These are long-run averages, not promises. Stocks went a full decade with almost no real return (2000-2009), and bonds had their worst year in modern history in 2022. The point is not the exact figure -- it is the ranking: more expected return always comes bundled with bigger drops. (Source: Ibbotson SBBI, 1926-2023.)

Compare stock, bond, and cash charts

Pull up SPY (US stocks), AGG (US bonds), and BIL (Treasury bills) and compare their 1-year and 10-year charts. Notice how SPY climbs the most but also takes the deepest dips.

Higher returns always come with bigger drops

Expected return and maximum drawdown rise together. If someone offers you high returns with no big drops, either it is not really a high return, or the risk is hidden somewhere you cannot see it -- often inside illiquid or leveraged products.

When a pitch sounds too good to be true

An investment promises 'stock-like returns with bond-like stability.' What should you assume?
Check your understanding

Sit with the ideas.

Over the long run US stocks have returned about 10% a year and bonds about 5%. Why doesn't everyone just hold 100% stocks?

Why:
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Other lessons in this course.

  1. 01Asset Allocation by Time Horizon
  2. 02Stocks vs Bonds vs Cash: The Numbers— reading now
  3. 03The Three-Fund Portfolio
  4. 04Target-Date Funds and Glide Paths
  5. 05Opening a Brokerage Account
  6. 06Funding Your Account and Your First Buy
  7. 07Dollar-Cost Averaging vs Lump-Sum
  8. 08Position Sizing and Rebalancing: Keeping Your Target Weights
  9. 09Rebalancing Rules: Calendar vs Threshold
  10. 10Asset Location: Which Account Holds What
  11. 11Tax-Loss Harvesting -- The Mechanics
  12. 12I-Bonds and TreasuryDirect
  13. 13Sequence-of-Returns Risk
  14. 14Equity Compensation as Concentrated Risk
  15. 15The 5 / 10 / 30-Year Checkup
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