by Donald Gould

In 1976, Roger Ibbotson and Rex Sinquefield, former classmates at the University of Chicago, published their seminal work, “Stocks, Bonds, Bills, and Inflation: Year-by-Year Historical Returns (1926–1974).” Their study, nicknamed SBBI, was the first to provide reliable data on the historical returns of U.S. financial markets, and its impact was huge.

For the first time, analysts could confidently measure the extra return investors had earned on stocks as compared to bonds, how much additional risk that entailed, and how well stocks and bonds had kept up with inflation. Fifty years later, the updated SBBI now includes a full century of historical returns. The story it tells is remarkable and holds lessons for all investors.

An astounding century of returns

If you invested $1,000 in U.S. large cap stocks at the beginning of 1926, your portfolio would have grown to $21,444,000 by the end of 2025. You read that correctly. If you’re thinking that there’s been lots of inflation over the past century, you’re right. It takes about $18,000 today to match what $1,000 bought a century ago. Still, the purchasing power of the investment grew about 1,200-fold, an astonishing feat.

Meanwhile, the same $1,000 invested in long-term U.S. government bonds grew to about $132,000. Not bad, but only a tiny fraction of what stocks delivered. The same amount invested in U.S. Treasury bills grew to about $25,000, only modestly ahead of inflation.

Return and risk

Stock prices fluctuate in response to corporate earnings, economic growth, interest rates, inflation, shocks like war and pandemic, and more. In contrast, high-quality bond prices are far less volatile. Financial theory argues that as compensation for accepting a much bumpier ride, stock investors should earn greater returns in the long term. The SBBI data bears this out. The compound annual growth rates of stocks and bonds over the last century were 10.5% and 5.0%, respectively. The extra 5.5% in annual return from stocks translated into 162 times more money after 100 years, a testament to the wonders of long-term compounding.

But before loading up on stocks, consider their risks. Since 1926, stock investors have endured all sorts of unpleasantness, ranging from overnight crashes to multi-year bear markets to decade-plus stretches of poor returns. The S&P 500 plunged 20.5% in the October 1987 “black Monday” crash and later experienced prolonged downturns of 49% in the 2000-2002 “dot-com bust” and 57% in the 2007-2009 “great financial crisis.” For the 1966-1981 period, almost a full generation, U.S. stocks failed even to match inflation.

Hazardous extrapolation

For newer investors, these cautionary tales probably seem like ancient history, making the idea of a bear market something of an abstraction. And with the U.S. stock market mostly soaring over the past 17 years, even veteran investors have dimming memories of bygone traumas.

Against this backdrop, some investment industry voices are calling for very aggressive long-term portfolio allocations (e.g., 90% stocks, 10% bonds/cash), pointing to stocks’ massive performance edge over the last century. Proponents of these high-octane portfolios commonly cite comforting statistics drawn from SBBI data; for example, that stocks have beaten bonds in more than 90% of all 20-year periods in the last century. The implication is that long-term investors can ignore shorter-term fluctuations in portfolio value.

Here’s the rub. In my experience, very few investors can tolerate a rapid 40%-50% drop in their portfolio value, something a 90-10 investor would already have experienced twice since 2000. Investors who take on more risk than they can stomach invariably slash their stock holdings after a substantial market decline, locking in losses and limiting gains in subsequent market recovery. The 90-10 mix might have worked for Rip Van Winkle (who took a 20-year nap), but real-life investors must have portfolios they can live with in the short term if they are to benefit from stocks’ long-term higher expected returns.

One more big caveat

On one hand, SBBI is a big data set, the kind financial analysts love, with more than 1,200 monthly data points across multiple assets. On the other hand, it covers just a single century in a single country whose markets survived and thrived. Not all countries were so fortunate. Germany and Japan saw their stock markets go to zero in the wake of World War II. The SBBI data on U.S. markets shows just one of many possible outcomes.

Historical investment returns are like history books: instructive, but not necessarily predictive. Facing an uncertain future, an investor’s best tools are diversification, attention to risk, and a measure of cautious optimism. Investors who can absorb the lessons of SBBI, without mistaking past returns for a guarantee, will be better prepared for whatever the coming century brings.

Don Gould is president and chief investment officer of financial advisory firm Gould Asset Management of Claremont.