Investors Haven’t Done Well?

Dean Baker writes:

In fact, investors in stock have not done very well over the last decade. The S&P 500 rose by a cumulative total of 52.6 percent from December 1997 to December 2007. After adjusting for inflation, the increase was 17.3 percent, which translates into real growth of just 1.6 percent a year. Add in a dividend yield of approximately the same size and we get that the average real return on stocks over the last decade has been 3.2 percent, a bit lower than the yield available on inflation indexed government bonds at the time.

Actually, the equity premium of stocks over long-term Treasuries has been much lower than most people realize. From 1969 to 2005, it’s only been 1.7% annualized. (These numbers are from Ibbotson.) That means investors can reasonable expect nominal equity returns of around 6%.
On the other hand, according to standard valuation models, the market is still very much underpriced. It’s been so dramatic that we could be going through a major shift in equity valuations. This could be one of the big stories of this decade (and hopefully, a post).
Also, the equity premium series is very volatile, so a 10-year period of zero to no premium isn’t that unusual. The 70s were worse and even the 80s don’t look that amazing. Though I would quibble with Baker’s statement that investors haven’t done well. Over the last five years, the total return of the Wilshire 5000 is 93.1% or 14.1% annualized.
(Via Salmon)

Posted by on January 2nd, 2008 at 3:10 pm


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