A Look at the Long Term

Here’s a question for you.
Including dividends and inflation, what’s the average rate of return for the broad stock market?
12%?
15%?
Not even close. Over the last 80 years, the real return of equities is just 7.1%. Pretty small. At that rate, you’ll double your money every 10.1 years.
I don’t think most investors realize how small the historical rate of return is.
Below is an interesting graph I made, but bear with me, it takes some explaining. I took the 80-year real return data and divided it by a line growing at 7% a year. By doing this, the unusual bull and bear periods stand out a lot better.
(If you’re confused, think of it this way: When this line is moving straight, equities are growing at 7% a year. Also, the line roughly begins and ends at 1.0.)
Interestingly, the 1987 crash only appears as a rather minor blip. From 2000-2002, the line gave back everything it gained from 1995 to 2000. Six years ago, it was hard to tell people that this isn’t normal. Now I think you can see what an outlier that period was.
It looks like there’s only been three truly great bull markets: one in the late-20’s, another in the early-50’s and another from 1982-2000.
I also think it’s interesting that the peaks and troughs are fairly symmetrical (1942 and 1982, 1966 and 2000).

Posted by Eddy Elfenbein on January 27th, 2006 at 2:18 pm

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