The conventional wisdom has been that, over any 20 year period, stock returns will beat bonds and other fixed income investments. For the past 80 years, returns on stocks have been greater than bonds. But, for the past 20 years, bonds have outperfomed stocks. If someone had retired 20 years ago, needing to live off the returns on a portfolio invested mostly in stocks, they would have had a difficult time.

SimpleStockInvesting has historical returns and charts, both actual and inflation adjusted, of the S&P500. A look at the chart of the inflation adjusted price of the S&P 500 (3rd chart) provides a sobering reminder that stock prices may just barely keep up with inflation. If an investor had bought the S&P 500 in 1965 and sold 27 years later in 1992, his inflation adjusted price would have been the same.

A 25 year old investor can use the 80 year history of the stock market as a guideline. The 50 or 60 year old investor doesn’t have that luxury and is more concerned with the volatility of an investment. Balancing both return and volatility is a difficult task.

Let’s look at another investment – gold. Gold prices have been rising this decade and the London fix price per ounce hit an all time high of $1060 this past week. So, is gold a good long term hold? In January 1985, gold had fallen to $300 an ounce. Let’s say an investor had bought at that price. Adjusting for inflation puts the cost at $750. In the past 25 years, you would have made 1.25% more than inflation. But what if you had needed the money in 2007? You would have broken even after 25 years.

You can solve the problem of volatility by keeping your savings in money market funds or short term Treasuries but the return often doesn’t keep up with inflation.

Several decades ago, Harry Browne and a few colleagues came up with a balanced strategy, the Permanent Portfolio, that they thought would give an investor returns that would beat inflation but would not be volatile. You can read about the history here and a 36 year history of returns using his strategy here.