Pursuing a Better Investment Experience – Decision 4: Let the Markets Work for You

Most people look to the financial markets as their main investment avenue—and the good news is that the capital markets have rewarded long-term investors. The markets represent capitalism at work in the economy, and historically, free markets have provided a long-term return that has offset inflation.

This is documented in the Growth of a Dollar graph, which shows monthly performance of various indices and inflation from 1926 through 2015. These indices represent different areas of the US financial markets, such as stocks and bonds.



The data illustrates the beneficial role of stocks in creating real wealth over time.

T-bills have barely covered inflation, while longer-term bonds have provided higher returns over inflation. US stock returns have far exceeded inflation and significantly outperformed bonds.

Another key point is that not all stocks or bonds are the same. For example, consider the performance of US small cap stocks vs. large cap stocks over this time period. A dollar invested in small cap stocks in 1926 would be worth more than $21,000 in 2014, compared to more than $3,900 for large cap stocks.

Keep in mind that there’s risk and uncertainty in the markets. Historical results may not be repeated in the future. Nevertheless, the market is constantly pricing securities to reflect a positive expected return going forward. Otherwise, people would not invest their capital.

In US dollars. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. US Small Cap Index is the Fama/French US Small Cap Index; US Large Cap Index is the Fama/French US Large Cap Index; Long-Term Government Bonds Index is 20-year US Government Bonds; Treasury Bills are One-Month US Treasury bills; Inflation is the Consumer Price Index. Fama/French Data provided by Fama/French. Eugene Fama and Ken French are members of the Board of Directors for and provide consulting services to Dimensional Fund Advisors LP. Bonds, T-bills, and inflation data © Stocks, Bonds, Bills, and  Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). Past performance is no guarantee of future results.