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May I ask where you got your 3% because that number is very low compared to any number I have ever read? This Wikipedia chart shows annualized returns to be 10.

May I ask where you got your 3% because that number is very low compared to any number I have ever read? This Wikipedia chart shows annualized returns to be 10.47%. That is >3x your 3%. https://en.wikipedia.org/wiki/S%26P_500_Index#Annual_returns https://en.wikipedia.org/wiki/S%26P_500_Index#Annual_returns

kragen 10y ago
3% is an estimate of the rate of economic growth: http://www.tradingeconomics.com/united-states/gdp-growth http://www.tradingeconomics.com/united-states/gdp-growth As I said above, we should expect the market's long-run returns to be close to the rate of economic growth. It's true that stocks in the US in the 20th century dramatically outperformed that 3%. This is for three reasons: first, up to about 1975, the world's economic growth rate was higher than 3%, due to the Second Industrial Revolution; second, up to about 1975, the US's economic growth rate was even higher than the world's, because it was taking over the markets previously supplied by the bombed-out economies of Europe (especially the UK) and Japan. Third, since about 1970, the share of economic output that went to owners of capital (rather than labor) increased dramatically. Now, the third of those things probably can't happen again, because capital's share of output is already super high. (It's not that it can't get higher, but it can't go past 100%.) The second could happen again, but if it does, the US will be in the position of the UK, Japan, or Germany — it's now the Single Superpower (not even a mere Great Power) who could lose market share, probably to China or to a non-nation-state power. Investors in Japan's and Germany's stock markets in 1925 or 1935 didn't do so well. The first, well, that's anyone's guess. It's a total wildcard. It's certainly reasonable to posit a Third Industrial Revolution, made out of some of free software, nanobots, biotech, abundant solar energy, AI, and automated fabrication. I sure hope we get one. But if we do, it's not at all obvious who the returns will flow to. (Everyone, I hope, not just shareholders.) Accumulating capital goods, as we've been doing for three million years, is less important when your capital stock can double every 24 hours through self-replication. Breweries do not account for the quantity of yeast they have on hand as a durable capital asset. And it seems equally plausible that we'll instead experience a new Bronze Age Collapse or Decline and Fall, as inexpensive DIY drones, very affordable precision projectiles, anonymous markets in assassination, and ubiquitous retail surveillance provide a decisive advantage for attackers over defenders in the physical world, just as their software counterparts have on the internet.
- gonzoflip 10y ago
  I understand the rate of GDP growth, the person you replied to specifically stated that they would have made more money on the SPX. Granted the S&P 500 is not guaranteed to go up, but historically it does. "...first, up to about 1975, the world's economic growth rate was higher than 3%, due to the Second Industrial Revolution; second, up to about 1975, the US's economic growth rate was higher than the world's, because it was taking over the markets previously supplied by the bombed-out economies of Europe (especially the UK) and Japan." Do you read the posts you reply to? Because the chart I linked starts in 1970. And you are discussing GDP when the post you were replying to specifically was talking about investing in the market.
- Will_Do 10y ago
  There's not much reason (and even less empirical evidence[1]) to believe that U.S. stocks should follow U.S. economic growth rates. [1]: http://www.economist.com/blogs/buttonwood/2014/02/growth-and-markets http://www.economist.com/blogs/buttonwood/2014/02/growth-and...
  - kragen 10y ago
    To summarize the article, the long-run correlation between stock prices and economic growth rates is positive at 0.51, and in the short run the correlation is actually negative (no number given), because investors bid up stock prices in fast-growing economies, because they expect the growth to continue. If the growth did continue, then they would make money, but often it doesn't, so they overpaid, so they get below-average (and often below-break-even) returns. Also, per-capita GDP growth is irrelevant; what correlates positively with equity returns is total GDP growth, including the change in population. So, on the contrary, this article provides a great deal of reason and even empirical evidence to believe that returns on US stocks should follow US economic growth rates.
- schwabacher 10y ago
  I'm not an expert here, but doesn't it make sense for stocks to return higher than growth because of earnings? For example imagine I own stocks making up 1% of in a company w/ earnings of $X, and market cap of 10 * $X. If the companies growth over a year is 3%, at the beginning of the year my stocks should be worth 0.01 * $X and at the end of the year 1.03 * 0.01 * $X due to the growth, BUT shouldn't i also have received 0.01 * $X (my share of earnings) in dividends that I am free to reinvest, giving me a 4% return overall?

kragen 10y ago

3% is an estimate of the rate of economic growth: http://www.tradingeconomics.com/united-states/gdp-growth http://www.tradingeconomics.com/united-states/gdp-growth As I said above, we should expect the market's long-run returns to be close to the rate of economic growth. It's true that stocks in the US in the 20th century dramatically outperformed that 3%. This is for three reasons: first, up to about 1975, the world's economic growth rate was higher than 3%, due to the Second Industrial Revolution; second, up to about 1975, the US's economic growth rate was even higher than the world's, because it was taking over the markets previously supplied by the bombed-out economies of Europe (especially the UK) and Japan. Third, since about 1970, the share of economic output that went to owners of capital (rather than labor) increased dramatically. Now, the third of those things probably can't happen again, because capital's share of output is already super high. (It's not that it can't get higher, but it can't go past 100%.) The second could happen again, but if it does, the US will be in the position of the UK, Japan, or Germany — it's now the Single Superpower (not even a mere Great Power) who could lose market share, probably to China or to a non-nation-state power. Investors in Japan's and Germany's stock markets in 1925 or 1935 didn't do so well. The first, well, that's anyone's guess. It's a total wildcard. It's certainly reasonable to posit a Third Industrial Revolution, made out of some of free software, nanobots, biotech, abundant solar energy, AI, and automated fabrication. I sure hope we get one. But if we do, it's not at all obvious who the returns will flow to. (Everyone, I hope, not just shareholders.) Accumulating capital goods, as we've been doing for three million years, is less important when your capital stock can double every 24 hours through self-replication. Breweries do not account for the quantity of yeast they have on hand as a durable capital asset. And it seems equally plausible that we'll instead experience a new Bronze Age Collapse or Decline and Fall, as inexpensive DIY drones, very affordable precision projectiles, anonymous markets in assassination, and ubiquitous retail surveillance provide a decisive advantage for attackers over defenders in the physical world, just as their software counterparts have on the internet.

gonzoflip 10y ago
I understand the rate of GDP growth, the person you replied to specifically stated that they would have made more money on the SPX. Granted the S&P 500 is not guaranteed to go up, but historically it does. "...first, up to about 1975, the world's economic growth rate was higher than 3%, due to the Second Industrial Revolution; second, up to about 1975, the US's economic growth rate was higher than the world's, because it was taking over the markets previously supplied by the bombed-out economies of Europe (especially the UK) and Japan." Do you read the posts you reply to? Because the chart I linked starts in 1970. And you are discussing GDP when the post you were replying to specifically was talking about investing in the market.
Will_Do 10y ago
There's not much reason (and even less empirical evidence[1]) to believe that U.S. stocks should follow U.S. economic growth rates. [1]: http://www.economist.com/blogs/buttonwood/2014/02/growth-and-markets http://www.economist.com/blogs/buttonwood/2014/02/growth-and...
- kragen 10y ago
  To summarize the article, the long-run correlation between stock prices and economic growth rates is positive at 0.51, and in the short run the correlation is actually negative (no number given), because investors bid up stock prices in fast-growing economies, because they expect the growth to continue. If the growth did continue, then they would make money, but often it doesn't, so they overpaid, so they get below-average (and often below-break-even) returns. Also, per-capita GDP growth is irrelevant; what correlates positively with equity returns is total GDP growth, including the change in population. So, on the contrary, this article provides a great deal of reason and even empirical evidence to believe that returns on US stocks should follow US economic growth rates.
schwabacher 10y ago
I'm not an expert here, but doesn't it make sense for stocks to return higher than growth because of earnings? For example imagine I own stocks making up 1% of in a company w/ earnings of $X, and market cap of 10 * $X. If the companies growth over a year is 3%, at the beginning of the year my stocks should be worth 0.01 * $X and at the end of the year 1.03 * 0.01 * $X due to the growth, BUT shouldn't i also have received 0.01 * $X (my share of earnings) in dividends that I am free to reinvest, giving me a 4% return overall?