Which has a higher average return over time: stocks, bonds, or a savings account? Explain your answer.

When comparing investment vehicles such as stocks, bonds, and savings accounts, one must consider various factors including potential returns, risk levels, and investment time horizons.

Stocks represent ownership in a company and offer potentially high returns with corresponding high risks, as their values fluctuate with the company's performance and market conditions. Stock investors benefit from capital gains and dividends, but must also be prepared for volatility.

Bonds, on the other hand, are considered more stable as they are essentially loans to a government or corporation which pay back a fixed interest over time. The risk is lower than stocks, but so are the returns, as they typically pay a steady but modest interest rate. Savings accounts provide the lowest risk with guaranteed returns up to a certain deposit amount, usually insured by the government, at the cost of much lower potential returns compared to stocks and bonds. They are most suitable for short-term saving goals or as an emergency fund due to their liquidity and stability.

The average return on an investment is a crucial metric for assessing an investment's performance. It is the amount of money made or lost on an investment over a specified period, expressed as a percentage.

Historically, stocks have offered the highest average returns over the long term; however, their high volatility means investors may see large fluctuations in their investment value over shorter periods.
Bonds offer lower average returns than stocks but provide more stability, meaning less extreme ups and downs. This makes them attractive for investors seeking steady income or those with lower risk tolerance.

Savings accounts offer the lowest average returns but are highly safe, making them suitable for preserving capital in the short term. While the returns on savings accounts might seem negligible, especially in low-interest-rate environments, they play a crucial role in a diversified investment portfolio for risk management and liquidity purposes.

Investment indexes track the performance of a specific basket of investments and are often used as benchmarks to compare the performance of individual investments or investment strategies.

The S&P 500 index, which includes 500 of the largest publicly traded companies in the U.S., is a good measure of the overall performance of American stocks. Over the long run, the S&P 500 has delivered an average annual return of about 10%, but this number does not account for the variability of returns year over year.

The Barclays US Aggregate Bond Index is a common measure for the performance of U.S. investment-grade bonds. Since its inception in 1976, it has yielded an average annual return of approximately 7-8%, reflecting the more stable nature of this asset class compared to stocks.

Understanding these indexes is essential for investors, as they provide a historical benchmark to evaluate the potential growth of their portfolios and inform their investment strategy based on past performance trends, albeit without guaranteeing future returns.