Commentaries History of Returns
We want to form an opinion about future returns. We can learn a lot by looking at the past.

We will take advantage of comprehensive US databases to look at the historical returns on various classes of US assets.

You may want to refresh your memory about the difference between 'real' and 'money' returns in 'Real Returns'. Also the concept of risk premiums.

The US results in this section are lifted from a famous series of US studies by Jeremy Siegel.

The return on equities
The real return on US stocks for the 194 years 1802-1996 was 6.9% per annum. If you think this is low you have been having too many drinks in City bars.

Cutting this period into three big chunks, we get:


Surprisingly stable!

How similar were the returns across markets? The real dollar returns per annum on stocks in the 70-year period 1926-1996 were:


Fairly stable! (This period included WWII)

  • Does this mean we can expect a 7% return on stocks in the future? No!
  • Does this mean that we can expect a 7% return on stocks over short periods? Definitely not!
  • All this means is: to set expectations for the investment returns available over long time horizons, a 7% real return on equities is a good number to start with. (In fact the current- August 2005 - consensus for rather lower returns for equities in the future

Oh, and what about the UK in sterling terms?

Last 103 years Last 50 years Last 20 years
5.0% 7.0% 8.2%

Nothing too surprising there!

The return on US Government bonds
These are what in the UK we call 'gilt-edged securities'. Being underwritten by the government these are (fairly) safe but subject to interest rate risk.

The real return on US government bonds in the 194 years 1802-1996 was 3.4% per annum. Notice the risk premium of equities over bonds was just 3.5% (6.9% minus 3.4%)

The return on cash
The 194-year real return on US short-term dollar deposits was 2.9% per annum. The bond/cash risk premium over this time was therefore 0.5%. (Returns on both cash and bonds have been much lower in the last 80 years, but that's another story).

The return on gold
The 194-year real return on gold was 0.1% per annum.

Gold is a non-income producing asset that we would expect to track inflation and therefore earn a real return of zero. There's a lesson here for those who would make their money from commodities.



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