In his gloomy long-term forecast on the return on investments at Forbes William Baldwin lost me a bit when he wrote this:
Stocks have returned a glorious 7% annually over the past century (total return, net of inflation). Continuing on the same course, they’d deliver very comfortable golden years to you. But they won’t do that. The stock market is now poised to deliver not even half its historical return.
because he perpetuated a widespread misunderstanding. Consider the chart of the performance of the Dow-Jones Industrial Average from 1915 to 2017, displayed above. It’s true that the average returns since the end of World War II have been about 7%.
What were the average returns from January 1966 to April 1995? They were zero over a twenty-nine year period. In other words if you started investing in a DJIA-indexed fund at age 35 in January of 1966 (if there had been such things at the time) and retired at age 64 your investments would have realized exactly nothing. Unless dividends were paid but that’s another story.
How about if you put money into a DJIA-indexed fund in December of 1999 and withdrew it in May of 2013? How much would you have realized. Again, zero.
The DJIA doesn’t increase in with smooth, dependable regularity but in fits and starts. Unless there’s a compelling reason to think otherwise we should expect that to continue for the foreseeable future or, in other words, we simply can’t predict what the value of an investment will be that far out. It depends not only on your acumen (or the acumen of your investment advisor—another topic for a post) but on your timing.
That’s why I believe that some form of social insurance is necessary. Putting your money into 30 year Treasuries is just about the equivalent of burying it in the ground and, unless you’re willing to accept higher levels of risk, the likelihood of your losing your money rises as you climb the “risk ladder” seeking higher returns. Some will be winners and some will be losers.
Unless you’re willing to allow the losers to starve, some form of social insurance is necessary. It also explains why I think the Fed’s strategy has been so damaging but that, too, is a topic for another post.
That is an inflation adjusted Dow? I can tell since the Dow was 400 in 1929. I think the cited 7% is non inflation adjusted.
That’s why I think just like bracket creep, capital gains may need to be inflation adjusted balanced with a higher rate.
Your chart is why they came up with 60/40 stock bonds.
I think you’re right—another misconception.
Some observations:
Uncertain returns? That’s why they call it equity.
It’s easy to observe that valuations are high. It’s much more difficult to predict when mean reversion will occur. That’s why most competent money managers advocate the importance of “being in the market.†Asset allocations are the product of age, risk tolerance, having cash to ride out the lows or flats etc
Dividends can’t just be ignored. They are part of return.
I’ve lost track, but Ibbotson used to track it. Long term total returns were 11%.
Bernanke and Yellen should be imprisoned. For all the talk of income inequality they have destroyed fix income gains and boosted equity and housing gains.
Oh. Let’s keep income spplementation separate from investment.
Let’s see. Berkshire-Hathaway, Amazon, Google, Merck, Pfizer, and Calgen don’t pay dividends. Apparently, they don’t agree with you.
Dividend yields also remain historically low.
You guys missed the point. Dividends must be included in the total return, not just price appreciation. Everyone agrees with that.
I got your point, I was just pointing out that dividend yields have been low for two decades.
I read that almost half of that 7% overall return since WWII is thanks to dividends (assuming reinvestment), so yes, they do need to be included. But given the experience of the last two decades, dividends aren’t a big component anymore – they barely cover inflation.