Long-Term Returns and Maximum Drawdowns of Stocks, Bonds, Real Estate, and Gold

When we save money, we can put it in a bank account or invest it in assets such as stocks, bonds, real estate, and gold. But which of these assets has delivered the highest returns over the long run? And which has experienced the greatest losses when prices have fallen? To answer these questions, we first need to understand returns and risk. In investing, a return measures how much your money has gained or lost in value. For example, if you invest $1,000 and your investment grows to $1,100, your return is 10%. If its value falls to $900, your return is -10%. However, comparing investment returns involves more than looking at price changes. Stocks can pay dividends, bonds can pay interest, and real estate can generate rental income. When we account for both changes in an asset’s price and the income it produces, we arrive at what is known as its total return. Inflation is another important factor. Suppose your investment grows by 5% over a year, but prices throughout the economy rise by 3%. Your actual purchasing power has increased by only about 2%. A return that does not account for inflation is called a nominal return, while one that does is called a real return. With these concepts in mind, we can examine how stocks, bonds, real estate, and gold have performed over long periods. Stocks represent ownership in a company. When a company grows and earns more money, its stock may become more valuable. Some companies also distribute part of their profits to shareholders through dividends. However, stock prices can fall sharply when a company struggles or the economy weakens. Bonds work differently. When you buy a bond, you are essentially lending money to a government or company in exchange for interest payments. Bonds issued by financially strong governments are generally considered less risky than stocks. Nevertheless, existing bond prices can fall when market interest rates rise, and there is always some risk that the issuer may fail to repay its debt. Real estate consists of physical assets such as land and buildings. Investors may earn money when property values rise or by collecting rent from tenants. However, property ownership also involves maintenance expenses, taxes, and transaction costs. Unlike stocks, real estate can be difficult to sell quickly when you need cash. Gold is somewhat different from the other three assets. Gold does not generate profits or pay interest. Instead, its scarcity and long history as a store of value sometimes make it attractive to investors during periods of economic uncertainty. Even so, gold prices can fluctuate significantly depending on supply and demand, interest rates, and currency movements. Now let us examine what historical data tells us. In 2017, researchers affiliated with the Federal Reserve Bank of San Francisco and other institutions published a study examining returns on stocks, bonds, and residential real estate across 16 advanced economies from 1870 to 2015. The researchers found that stocks and residential real estate produced similar long-term average annual real total returns of approximately 7%. Long-term government bonds generated a considerably lower average real return of about 2.5% per year. These figures represent arithmetic averages across countries and years. They do not mean that an investment consistently compounded at those rates every year. One particularly interesting finding concerns real estate. Many people assume that stocks must have delivered much higher returns than property over the long run. However, when rental income is included, residential real estate has also produced substantial historical returns. It is important to understand that the study's real estate returns do not simply represent increases in home prices. They also account for rental income and certain expenses, including maintenance costs. For this reason, they should not be directly compared with the price appreciation of a particular house or apartment. What about gold? According to the Global Investment Returns Yearbook published by UBS in 2026, the inflation-adjusted U.S. dollar price of gold increased approximately 5.2 times between 1900 and 2025. That corresponds to a compound annual real return of about 1.3%. Gold has therefore played a role in preserving purchasing power over very long periods. However, unlike stocks, it does not provide investors with a share of corporate earnings or dividends. Gold returns also vary considerably depending on the period examined. Because the studies use different time periods and calculation methods, their reported returns should not be treated as directly comparable figures. So far, it might seem that the asset with the highest historical return must be the best investment. But returns are only one part of the story. Another important question is how much an investment can lose along the way. One widely used measure of this risk is maximum drawdown, often abbreviated as MDD. Maximum drawdown measures the largest decline in an asset's value from a previous peak to a subsequent low during a specified period. Imagine investing $1,000 and watching your investment grow to $1,500 before falling to $900. Compared with your original investment, you have lost only 10%. But compared with the previous peak of $1,500, the investment has fallen by 40%. Its maximum drawdown over that period is therefore -40%. MDD matters because an investment can deliver attractive returns over decades while still exposing investors to enormous losses along the way. Consider the Great Depression. The U.S. stock market suffered a devastating collapse beginning in 1929. The S&P Composite Index, a historical predecessor of today's S&P 500, fell approximately 86% from its peak in 1929 to its low in 1932, based on index prices. If you had invested $1,000 and experienced that decline, your investment would have been worth only about $140. Although the U.S. stock market eventually recovered and grew over the following decades, investors who lived through the Great Depression faced extraordinary losses. Bonds have also experienced significant declines. Between 2020 and 2022, rapidly rising interest rates caused substantial losses in the U.S. bond market. The Bloomberg U.S. Aggregate Bond Index, which tracks a broad range of investment-grade bonds, suffered a total-return drawdown of approximately 18% from its 2020 peak to its 2022 low. This illustrates why bonds should not be considered completely risk-free. Long-term bonds are particularly sensitive to interest rate changes and can experience sharp price declines when rates rise rapidly. Real estate is not immune to major losses either. During the mid-2000s, U.S. home prices climbed dramatically. But when the housing bubble burst, prices fell sharply. The S&P CoreLogic Case-Shiller U.S. National Home Price Index declined approximately 27.4% from its 2006 peak to its 2012 low. This figure reflects changes in a national home price index, not the maximum drawdown of a real estate investment including rental income. Some individual housing markets experienced considerably larger declines. Gold has also suffered severe losses despite its reputation as a safe-haven asset. After surging in 1980, the U.S. dollar price of gold declined by roughly 65–70% from its peak to its lows in 1999. Investors who purchased gold near its peak could have faced losses for many years. There is an important limitation to these examples. The figures come from different historical periods, markets, and measurement methods. The stock and housing examples use price indexes, the bond example uses a total-return index, and the gold example uses its U.S. dollar price. They should not be interpreted as maximum drawdowns calculated under identical conditions for all four asset classes. Maximum drawdown also depends on the length of the period being studied. Longer periods have more opportunities to include severe market crashes. Results may also change depending on the country, whether investment income is included, and whether inflation and currency movements are taken into account. There is another reason large losses matter: recovering from them can be surprisingly difficult. If an investment worth $1,000 falls by 50%, its value drops to $500. To return to $1,000, it must then rise by 100%, not 50%. If an investment loses 80% of its value, a 400% gain is required to recover the original amount. This is why protecting your capital can be just as important as pursuing high long-term returns. So which of these four assets is the best investment? There is no single answer that applies to everyone. Stocks offer participation in business growth but can experience substantial price swings. Bonds provide interest income but are exposed to interest rate and credit risks. Real estate can generate rental income but requires significant capital and may be difficult to sell. Gold can behave differently from other assets, but it does not produce interest or dividends. Borrowing money to purchase real estate creates another important risk. Suppose you buy a $500,000 house using $100,000 of your own money and a $400,000 mortgage. If the property's value falls by 20%, the house is now worth $400,000. Assuming the mortgage balance has not changed, selling the house would leave you with nothing after repaying the loan. Although the property's price declined by only 20%, your original equity has effectively been wiped out. This example does not even include interest or transaction costs. Borrowing can increase investment gains, but it can also magnify losses. To manage these risks, many investors divide their money among different types of assets. This approach is called diversification. Diversification takes advantage of the fact that different assets do not always move in the same direction. For example, if stocks decline while certain bonds or gold rise, the overall portfolio may experience a smaller loss. However, during periods of high inflation or rapidly rising interest rates, stocks and bonds can fall together. Diversification reduces certain risks but cannot eliminate the possibility of losses. Ultimately, long-term returns tell us how much wealth an investment has generated, while maximum drawdown helps us understand how severe its declines have been along the way. Stocks, bonds, real estate, and gold generate returns in different ways and expose investors to different risks. Strong historical performance does not guarantee future returns. Understanding investing therefore requires more than identifying which asset has risen the most. We also need to consider why those returns occurred and how much risk investors had to bear to achieve them. Successful long-term investing is not simply about pursuing higher returns. It is also about protecting capital and finding a way to remain invested through difficult times.