As I mentioned, I was lucky enough to attend a private breakfast presentation from Dr. Jeremy Siegel over the weekend and he shared with us some of his research on the capital markets and personal finance. Here are some of the highlights:
If you had taken US$1 and invested it into the following assets in 1802, by the end of 2007 they would have grown to:
- US Stocks: $766,854
- Bonds: $1,320
- T-Bills: $302
- Gold: $2.45
- The US Dollar: $0.06
The return on stocks represents a real return of 6.8% (real return means ‘after accounting for inflation’) over this 200+ year period. The real return on gold has been 0.1% annualized over this time – this even accounts for the bulk of the run up in price to the end of 2007 remember. Bonds represented a real return of 3.5%.
His point in bringing up this data is that there is an “equity premium” of about 3 to 4% for stocks versus fixed income, and questions what is truly more risky over the long term: holding a basket of equities for the long term or holding a basket of fixed income?
He then said the question of this relationship existing in other markets was answered by a group of researchers who performed the same studies across many different countries (I think it was 20+), and almost the identical equity premium of 3 – 4% existed for stocks over bonds/bills.
Dr. Jeremy Siegel is author of Stocks for the Long Run, 4th Edition
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Since the period from 1802-2007 includes the industrial revolution, I wouldn’t expect those same returns in the stock market in the future.
Equity will always have higher return then any other asset class because of the risk premium.
Many profess it will be about a percent less then it had been in the past.
Al: Good point, I will add Dr. Siegel’s comments in the third installment on my coverage of his presentation.
Willfly: Agreed on both points, but I would add the word "expected" before "higher return" since it is possible to have a higher return with less risky portfolios once you account for variance. Unfortunately, we don’t live for 200 years yet so we have to be prepared for such a result.