The Long Game – Historical Market Returns & 2021 Expectations

The Long Game - Historical Market Returns and 2021 Expectations

In 2020, the market has spoken and again, taught even some the sharpest minds on Wall Street to stay humble.

Don’t look at the markets daily, other things in life, including cycling are more exciting. But once a year it may be a good moment to evaluate the State of Play

And if you took the plunge and invested in Stocks the dreams may be closer than expected. Over the past decade holding a World ETF (VT) returned, in USD, 9.3% per year

It’s also time to spend a few minutes to  (i) learn and acknowledge the limits of our ability to predict the markets (ii) evaluate how much you contributed to the portfolio but most importantly (iii) how far are you from achieving your goals and (iv) setting the right expectations

It’s probably also time to rebalance your portfolio – sell some of the winners, buy some losers? 

Some exceptional returns below may inspire you to ride a momentum wave and while this is great for learning with some small allocation do not to forget the rules of the game and remain forecast-free

If there is one take-away that is valid most of the time, it would be that the level of interest rates explains most of the behavior of asset classes – inflated NASDAQ given lower discounting factors, low opportunity costs in holding Gold or Bitcoin, low performance of Value Stocks and decreasing appeal of Bonds amongst others.

Winners rotated but Tech didn't

Asset Classes sorted by performance and 10-year average
  • REITs, Dividend Stocks and broader Value (Vanguard Value ETF is up only 2.3%) underperformed significantly in 2020, even though some of these assets (e.g. REITs) have good risk/reward over the past 20-year (see below)
  • Unless you really didn’t look at the markets for years you know that, Growth as illustrated by NASDAQ outperformed over the past decade (Vanguard Growth ETF up 40% in 2020).  What’s more, Apple, Amazon and Microsoft accounted for more than half of the S&P 500′s return this year. Absent the top 24 companies, the S&P 500 return would be negative in 2020
  • Despite not generating any income it was another great year for Gold and an exceptional one for Bitcoin (up 300%). Overall Bitcoin is up c.140% annually since 2011 but the volatility is extremely high (e.g. in 2018 the digital currency was down 73%).
  • I see a significant amount of wise-money retail investors contemplating a small allocation e.g. 1% of their portfolio to Bitcoin. A Bitcoin ETF may be coming at some point in 2021 to make this easier.
  • Emerging Markets do seem to gather momentum after a decade of relative underperformance
  • As a side note, the biggest star on Wall Street was Catherine Wood and her active-managed ARK ETFs – if you have access to these funds in Europe (only professional broker clients do), remember that winners end up rotating. These asset classes are by nature very risky – it is not uncommon for some top holdings (e.g. in ARKG) to drop 65% in a few days if a drug trial doesn’t go as well as planned. Liquidity may also be a major issue when outflows start.


As of 29/03/2024, Interactive Brokers offers rates up to 4.738% (GBP), 3.445% (EUR) and 4.83% (USD) on cash. 


As of 29/03/2024, Interactive Brokers offers rates up to 4.738% (GBP), 3.445% (EUR) and 4.83% (USD) on cash. 

What about Risk?

10-Year Performance - Average Annual Risk and Return
  • US large Caps that represent over 56% of World Stocks, remain one (if not the best) Risk/Reward asset class. Most back-testing tool frequently overweight it in portfolios explaining why some US Investors are reluctant to invest internationally 
  • It’s interesting to have a look at 10-year returns but given how unpredictable markets are, I wouldn’t draw major conclusions from it, apart from two observations that extend over longer time period (20 years)
  • Developed Markets ex-US are pretty much only returning dividends with limited price upside, but this is correlated with overall Value underperformance over the past decade(s)
  • Long Term Treasuries have high volatility but hedged well during both GFC and COVID-19 downturns (remember Standard Deviation doesn’t tell the whole story for Bonds)

Emerging Markets and Gold performed, Small Caps not worth the effort?

20 Year Performance - a slightly different picture
  • A number of investors like to skew their portfolios by adding ETFs representing (i) Value stocks or/and (ii) Small caps, since historically academic research suggested additional factors explaining returns. While the size adjustment was difficult to implement in the first place (needed an adjustment for small growth stocks hardly possible with existing ETFs) AQR has released a paper earlier this year suggesting that overall there may be no Small Size effect after all – in the end skewing your portfolio was perhaps a waste of efforts and marginal increase in fees and laziness in investing is rewarded once again (think Retriever Portfolio!)
  • Emerging Markets remain high risk/reward in the long run – but as illustrated in the performance matrix they tend to win/lose big every single year. The 2000s were a great decade though and on average, if you can deal with the volatility incremental returns do come with holding it
  • Gold is somewhat controversial (as is Bitcoin) but may have a place in a portfolio as 2020 demonstrated. Remember that, risk is high, though. As witnessed in the years after the GFC.
  • Dividend investing has a number of proponents and merits a separate discussion (I have included it here purely for comparison purposes)



European Investors - optically lower gains but overall wealthier

  • The USD is on a downward trend and this is felt if you hold USD assets. EUR is up 8.2% this year while GBP gained 3.2% (both versus the USD)
  • The US Investor would see his/her Vanguard FTSE All-World ETF up c. 15.8% this year. The same fund from UK investors perspective is up c. 13.3% and European investors only witnessed a 6.3% gain
  • That said, you are overall wealthier, since this is just a currency effect and if you move outside of Europe (or import goods) you have a stronger purchasing power
  • European Investors also benefitted from a natural currency hedge in March during the COVID-19 Sell-off (it worked again!). USD gained 10%+ in a matter of days and since over 56% of World Equities are in the US it did offset losses at the moment when needed the most

Once in a decade reminders

In the long run, you may need Liquidity

  • It’s been almost 15 years since massive Fund suspensions accelerated the GFC
  • Always think about the liquidity of the assets you invest in
  • My pension fund has a small allocation to a UK REIT that has been suspended since March! Real Estate is one of the asset classes that can be extremely illiquid.  In fact, real estate appraisers couldn’t properly value properties for few months invoking e.g. a ‘major valuation uncertainty’ clause. This may be problematic if you need to rebalance and/or are near to funding your goal.
  • I also had a few £ invested through P2P lenders, essentially to understand how they function. In March, all users queued to withdraw funds at once and I finally (again, 9 months later) received a notice that I can withdraw funds (some interest wasn’t fully paid)

In the Long Run, you may need Central Banks

When the Covid crash hit, bond ETFs faced their biggest challenge since launching in 2002.  Several of the most popular bond ETFs traded at meaningful discounts to their net asset values, sparking debate over whether the ETFs were broken or, instead, a better representation of the true value of the underlying bonds held. 

As I have written last year, we may never know with certainty whether some of these funds can withstand extreme stress, though. The FED as buyer of last resort provided the ultimate safety net.


As of 29/03/2024, Interactive Brokers offers rates up to 4.738% (GBP), 3.445% (EUR) and 4.83% (USD) on cash. 


As of 29/03/2024, Interactive Brokers offers rates up to 4.738% (GBP), 3.445% (EUR) and 4.83% (USD) on cash. 

Return Expectations

Bonds - don't expect much

As John C. Bogle noted, since 1926, the entry yield on the 10-year Treasury explained 92% of the annualized return an investor would have earned over the subsequent decade had he or she held the bond to maturity and reinvested the coupon payments at prevailing rates.

Currently, Government Bond ETF yields are low at best. 

For Europeans it’s about limiting damage and partially holding cash: 

  • If investing for 10 Years, the UK Investor can expect 0.25% annual nominal return (i.e. before inflation). After accounting for expected inflation the yield is -2.9%
  • Similarly, for the same time horizon, German Investors can expect -0.6% before inflation and -1.5% after inflation. 
Government Bonds' Yields (before Inflation)
levels of interest rates europe uk us 31 december 2020
Potential upsides

Are further price gains on Bonds possible? There are unlikely, but possible. Should there be another exogenous shock it’s not unreasonable to expect rates to go even lower (in which case Bond prices may rally).

You can also invest in Aggregate Bonds, instead of Government Bonds. 

The portion that is invested in high grade corporate bonds will provide you with an additional yield of 0.5% to 1% (as of December 2020) depending on the mix of Corporate/Mortgage issuers and sectors/geographies. 

Read more here if you are in Europe or here if based in the US.

Stocks - Investing at Market peaks

It’s hard to predict the future, but it’s even harder to predict second order (or higher) effects.

That said, current valuations may make you uncomfortable. JP Morgan has some good news about investing at peaks

“If you invested in the S&P 500 on any random day since the start of 1988 and reinvested all dividends, your investment made money over the course of the next year 83% of the time. On average, your one year total return was +11.7%”

Now, what do those figures look like if we only consider investments on days when the S&P 500 closed at an all-time high?

They’re actually better! Your investment made money over the course of the next year 88% of the time, and your average total return was +14.6%”

But of course, this is just an overall picture based on past experience. So was the expectation of a second dip during Covid.

Set up your portfolio, invest regularly, and don’t forget to have a plan in case things go wrong.

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For this exercise the following equity asset class returns have been reviewed.

For a comprehensive guide into Equity ETFs have a look here.

  • S&P 500 and NASDAQ need no introduction and are cornerstone to most portfolios
  • Dividend Stocks are favored by some investors but can be less diversified and tilled towards certain sectors / styles (e.g. value)
  • Developed Markets ex-US are important part of the Global Stock Market and include Japan, Europe or Australia
  • Emerging Markets is a volatile asset class but usually held for diversification and optionality should there was a shift of capital in global Economy towards these countries


For this exercise the following Fixed Income asset class returns have been reviewed.

For a comprehensive guide into Bond ETFs for International Investors have a look here.

  • Long Term Treasuries that provided the best downside protection in recessions. 
  • Bonds are Aggregate Funds for those seeking low volatility and some income
  • Corporates are high quality corporate bonds (Investment Grade Rating) that are primarily held for income. LQD ETF was used here and was the #1 ETF bought by the FED during the COVID-19 Sell-off
  • Inflation Linked Bonds are Government issues Bonds that are adjusted for Inflation
Thank you for reading.
Good Luck and Keep’em* Rolling!

(* Wheels & Dividends)



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