Stocks have historically outpaced bonds and savings accounts over long periods

The investments that have produced the highest returns over decades are individual stocks and stock market index funds. From 1926 through 2023, the S&P 500 — a basket of 500 large U.S. company stocks — returned an average of roughly 10 percent per year, though that figure varies significantly year to year. Bonds returned around 5 to 6 percent annually over the same span. Savings accounts and money market funds have typically returned 1 to 3 percent, depending on the interest rate environment.

The catch is that higher returns come with higher risk. Stock prices swing up and down month to month and year to year. If you need your money in two years, a sudden market drop could force you to sell at a loss. If you can leave money invested for ten years or longer, the historical data suggests you have time to ride out downturns and benefit from the long-term upward trend.

Real estate — both rental property and real estate investment trusts (REITs) — has also produced strong long-term returns, typically in the 8 to 12 percent range historically, though with significant variation by location and property type. Real estate requires more active management or capital to buy in, so it is not the right fit for everyone.

Key Takeaways

  • Stock market index funds have historically returned around 10 percent annually over decades, outpacing bonds, real estate, and savings accounts.
  • Higher historical returns come with higher year-to-year volatility, so stocks are most suitable for money you will not need for at least five to ten years.
  • Individual stocks can outperform the market, but they also carry the risk of significant loss and require research or professional guidance to select.
  • Real estate and REITs have produced strong historical returns but require either substantial capital or active management to generate income.
  • Your own situation — how much time you have, how much risk you can tolerate, and how much money you have to invest — matters more than chasing the highest historical return.

Why stock market returns beat other investments over time

Stocks represent ownership in companies. When a company grows and becomes more profitable, the stock price typically rises. Shareholders also receive dividends — portions of company earnings paid out to owners. Over long periods, this combination of price growth and dividend income has produced returns that outpace inflation and beat what you earn in a bank account.

The reason stocks beat bonds and savings accounts is simple: companies take on more risk than governments or banks do. A company can fail. A bank is insured by the FDIC up to $250,000 per account. The U.S. government has never defaulted on its debt. Because stocks are riskier, investors demand higher returns to compensate for that risk. History shows that demand has been justified — stocks have delivered those higher returns, though not every year.

Index funds versus individual stocks

An index fund is a collection of stocks bundled together to track a market index — the S&P 500, the total U.S. stock market, or international stocks, for example. When you buy one share of an S&P 500 index fund, you own a tiny piece of all 500 companies. If one company fails, your loss is spread across 499 others. Index funds charge low fees — often 0.03 to 0.20 percent per year — because a computer simply holds the same stocks as the index, with no manager making individual picks.

Individual stocks can outperform index funds. If you buy stock in a company that grows faster than the market average, your return will be higher. But the reverse is also true: if you pick a company that underperforms or fails, your loss is concentrated. Research shows that most professional stock pickers do not beat the market average over long periods after accounting for fees. For most people, index funds offer a simpler path to market-level returns without requiring the time or expertise to research individual companies.

If you do want to pick individual stocks, treat it as a small portion of your portfolio — perhaps 5 to 10 percent — and only with money you can afford to lose. The rest should go into diversified index funds.

Real estate and REITs as higher-return alternatives

Rental property has produced strong returns historically because you control a tangible asset, collect monthly rent, and benefit from property appreciation over time. If you buy a rental house for $300,000, collect $2,000 per month in rent, and the property appreciates 3 percent per year, your total return can exceed 10 percent annually. However, you also pay property taxes, maintenance, insurance, and vacancy periods when the unit sits empty. You need enough capital to make a down payment — typically 20 to 25 percent — and you must manage the property or hire someone to do it.

A Real Estate Investment Trust (REIT) is a company that owns and operates real estate — apartment buildings, shopping centers, warehouses, or data centers. REITs are required to distribute at least 90 percent of their taxable income to shareholders as dividends. You can buy REIT shares through a brokerage account the same way you buy stock, with no down payment required and no property management duties. REIT returns have historically been competitive with stocks, though they vary by property type and market conditions.

Bonds and fixed-income investments for lower risk

Bonds are loans you make to a government or company. In exchange, they pay you interest — typically 3 to 6 percent currently, though rates change with economic conditions. When the bond matures, you get your principal back. Bonds are less volatile than stocks: a bond's price does not swing as wildly day to day. If you hold a bond to maturity, you know exactly what you will receive.

The tradeoff is lower returns. A 10-year U.S. Treasury bond currently yields around 4 percent. A high-yield savings account yields 4 to 5 percent with no risk of loss. Corporate bonds pay more — sometimes 5 to 7 percent — but carry the risk that the company fails to pay. For money you need within five years, bonds and high-yield savings accounts are more appropriate than stocks, even though their returns are lower.

How your time horizon changes which investment makes sense

The longer you can leave money invested, the more sense it makes to take on stock market risk. If you are saving for retirement 30 years away, a stock market crash in year 5 is actually good news — it means stocks are cheaper and your regular contributions buy more shares. By year 30, the market will have recovered and grown. If you need the money in two years, that same crash is a disaster because you have no time to recover.

A common framework is the "rule of 100" or "rule of 110": subtract your age from 100 or 110, and that is roughly the percentage of your portfolio that should be in stocks. A 30-year-old would hold 70 to 80 percent stocks and 20 to 30 percent bonds. A 70-year-old would hold 30 to 40 percent stocks and 60 to 70 percent bonds. This is not a law — it is a starting point. Your personal risk tolerance, income stability, and specific goals matter more than your age alone.

The role of fees and taxes in actual returns

The 10 percent average return of the S&P 500 is before fees and taxes. If you hold stocks in a taxable brokerage account and sell at a profit, you owe capital gains tax — 15 to 20 percent for long-term gains, depending on your income. If you hold stocks in a 401(k) or IRA, you do not pay tax until you withdraw, which can make a significant difference over decades.

Fees also matter. An actively managed mutual fund might charge 0.5 to 1.5 percent per year. An index fund charges 0.03 to 0.20 percent. Over 30 years, that difference compounds dramatically. A 1 percent annual fee can cut your final balance by 25 to 30 percent compared to a 0.1 percent fee, all else equal. Always check the expense ratio before buying a fund.

Frequently Asked Questions

Can I lose all my money in stocks?

You can lose a significant portion if you hold individual stocks and the company fails or the market crashes. If you hold a diversified index fund, the chance of losing everything is extremely low — it would require the entire U.S. economy to collapse. Even during the 2008 financial crisis, the S&P 500 recovered within five years.

What is the difference between a stock and a mutual fund?

A stock is ownership in one company. A mutual fund or index fund is a collection of many stocks bundled together. When you buy a mutual fund, you own a small piece of each stock in the fund. Mutual funds reduce risk through diversification — if one company underperforms, others may outperform.

Should I invest in cryptocurrency if I want the highest returns?

Cryptocurrency has produced extreme returns in some years and extreme losses in others. Bitcoin and Ethereum are far more volatile than stocks. If you invest in crypto, treat it as a small, speculative portion of your portfolio — money you can afford to lose entirely. For most people building long-term wealth, stocks and index funds are a more reliable path.

Is it too late to start investing if I am already 50 or 60?

No. Even if you have 15 to 20 years until retirement, stocks have historically outpaced bonds and savings accounts. You may hold a higher percentage in bonds than a younger person would, but some stock exposure still makes sense. The worst time to start investing is always tomorrow.

Do I need a lot of money to start investing?

No. Most brokerages allow you to open an account with $0 and buy fractional shares of index funds for as little as $1. Starting small and investing regularly — even $50 or $100 per month — builds wealth over time through compound growth.