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These are the annualized returns from different asset classes  which illustrates data from the beginning of 1926 through the end of 2011 for the asset classes indicated. This data put together by a study in the Ibbotson SBBI 2013 Classic Yearbook is factoring in the Great Depression, “Dot-Com Bubble” and Great Recession, yet the annualized returns still exceed inflation on a per annum basis. When your money does not keep up with inflation, that is called “purchasing power risk”. When an individual is subject to purchasing power risk, they are technically losing money. An investors net return minus inflation is called his/her “real return”. For example, if it is assumed inflation is at 3% and you are not invested at all, your “real return” would be -3%.

   Asset Class      Geometric Mean Return  Standard Deviation
Large-cap stocks              9.8%              20.2%
Small-cap stocks             11.9%              32.3%
L-T corporate bonds           6.1%               8.3%
L-T US gov bonds              5.7%               9.7%
Mid-term US gov bonds         5.4%               5.6%
U.S. Treasury bills           3.5%               3.1%
Inflation                     3.0%               4.1%

The above data is based on the following information:

  • S&P 500 (large-company)
  • Primarily the smallest NYSE stocks (small company),
  • Maturities near 20 years for long-term corporate bonds and long-term
    U.S. government bonds
  • Maturities near five years for intermediate-term U.S. government
    bonds
  • Approximately 30-day maturities for Treasury bills.

Summary:

Overtime, your investments will grow. There may be down years, there may be volatile years (standard deviation shows volatility or how much the stock moves up and down, on average, per year), but with the right guidance and proper asset allocation, you can achieve financial freedom. The goal of the EI program is to get you started on that journey as young as possible, so you are not one of the retiree’s saying “I wish I would have started earlier”.