3 ms·

It seems like a real 6+% has been possible over the past half century. https://thume.ca/indexView/ https://thume.ca/indexView/ Granted, it could be that the S

It seems like a real 6+% has been possible over the past half century. https://thume.ca/indexView/ https://thume.ca/indexView/ Granted, it could be that the SP500 or the US over the past half century is not representative of equities over a longer time period, like a century, but in that case I don't know what is.

hogFeast 6y ago
Yes, all of those things aren't representative. I have no idea why people use the last fifty years, that is roughly your investing life-time, and you are using that as your only sample. That isn't investing, that is rolling the dice and hoping to get lucky. Dimson, Marsh, Staunton is the only representative long-term study of global returns. One, that sample still has selection bias (a couple of years ago, they found an issue with calculations for a market that went to zero, that knocked 10% off their estimates). Two, very bad events happen infrequently so you have a sample of a few thousand years across many countries: German hyperinflation is one year, Austro-Hungary is two years, China is a few years, etc. So there isn't a huge sample of very bad things given that capital markets have existed inconsistently for two centuries only. Three, there is a discontinuity between how finance professors look at the past, how investors today percieve the past, and how the past actually was. As an example, after WW2 equities did very well...one problem, the US had to issue a tons of govt debt, and forced everyone to own bonds. The sample doesn't really show that most people couldn't own equities. Equally, transaction costs are often not well understood (i.e. the assumption is that you can produce a market-cap weighted portfolio, and these effects are correlated to returns: when you can't produce a cap-weighted portfolio, returns are high because participation is low). But yes, their number is ~300bps real...I would emphasize though that you should actually read about market history, and understand the risks.
- omgwtfbyobbq 6y ago
  Are you sure about that? Summary Edition Credit Suisse Global Investment Returns Yearbook 2020, by Dimson, Marsh, and Staunton have (page 23) world mean real returns from 1900 to 2019 for equities at either 5.2% or 6.6%, depending on whether you look geometric or arithmetic mean. I could see 300bps real for a mix of equities and bonds, but equities alone appear to be much higher.
  - hogFeast 6y ago
    I would Google Equity Risk Premium. I believe your estimate is correct but that assumes a risk-free rate of more than zero. The risk-free rate is close to zero, which is why DSM forecast ERP of 350bps (and I believe their data still has survivorship bias). Also, remember that we are quite near the top in a market that is 50-60% of world share, so I would be conservative about projections when the end year is favourable (as an example, Stocks for the Long Run had a very big estimate of long-term returns in the late 90s...that fell in the subsequent years).
stevesimmons 6y ago
Over the last 50 years, inflation/interest rates have also gone from sustained periods of 10-20% down to basically zero. That massively inflates asset values, giving a component of those 6%+ returns that cannot recur in the future.
- omgwtfbyobbq 6y ago
  The 6% is real (including inflation) returns. Nominal (not including inflation) returns are higher.

hogFeast 6y ago

Yes, all of those things aren't representative. I have no idea why people use the last fifty years, that is roughly your investing life-time, and you are using that as your only sample. That isn't investing, that is rolling the dice and hoping to get lucky. Dimson, Marsh, Staunton is the only representative long-term study of global returns. One, that sample still has selection bias (a couple of years ago, they found an issue with calculations for a market that went to zero, that knocked 10% off their estimates). Two, very bad events happen infrequently so you have a sample of a few thousand years across many countries: German hyperinflation is one year, Austro-Hungary is two years, China is a few years, etc. So there isn't a huge sample of very bad things given that capital markets have existed inconsistently for two centuries only. Three, there is a discontinuity between how finance professors look at the past, how investors today percieve the past, and how the past actually was. As an example, after WW2 equities did very well...one problem, the US had to issue a tons of govt debt, and forced everyone to own bonds. The sample doesn't really show that most people couldn't own equities. Equally, transaction costs are often not well understood (i.e. the assumption is that you can produce a market-cap weighted portfolio, and these effects are correlated to returns: when you can't produce a cap-weighted portfolio, returns are high because participation is low). But yes, their number is ~300bps real...I would emphasize though that you should actually read about market history, and understand the risks.

omgwtfbyobbq 6y ago
Are you sure about that? Summary Edition Credit Suisse Global Investment Returns Yearbook 2020, by Dimson, Marsh, and Staunton have (page 23) world mean real returns from 1900 to 2019 for equities at either 5.2% or 6.6%, depending on whether you look geometric or arithmetic mean. I could see 300bps real for a mix of equities and bonds, but equities alone appear to be much higher.
- hogFeast 6y ago
  I would Google Equity Risk Premium. I believe your estimate is correct but that assumes a risk-free rate of more than zero. The risk-free rate is close to zero, which is why DSM forecast ERP of 350bps (and I believe their data still has survivorship bias). Also, remember that we are quite near the top in a market that is 50-60% of world share, so I would be conservative about projections when the end year is favourable (as an example, Stocks for the Long Run had a very big estimate of long-term returns in the late 90s...that fell in the subsequent years).

stevesimmons 6y ago

Over the last 50 years, inflation/interest rates have also gone from sustained periods of 10-20% down to basically zero. That massively inflates asset values, giving a component of those 6%+ returns that cannot recur in the future.

omgwtfbyobbq 6y ago
The 6% is real (including inflation) returns. Nominal (not including inflation) returns are higher.