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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 ↓
§ 01
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
§ 02

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.)

§ 03
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.
§ 04

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.

§ 05
An investment promises 'stock-like returns with bond-like stability.' What should you assume?
Five questions · AI feedback

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:

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. 08Rebalancing Rules: Calendar vs Threshold
  9. 09Asset Location: Which Account Holds What
  10. 10Tax-Loss Harvesting -- The Mechanics
  11. 11I-Bonds and TreasuryDirect
  12. 12Sequence-of-Returns Risk
  13. 13Equity Compensation as Concentrated Risk
  14. 14The 5 / 10 / 30-Year Checkup
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