Historical Performance and Future Stock Market Return Uncertainties
There has never been another period in history more demanding of investor efforts, nor as rewarding of investor diligence, as today’s. The current environment poses a broad range of uncertainties. Investors are now confronted by strong contrasts between conventional wisdom and unconventional insight. For example, conventional wisdom points to historical average returns for long-term investors, but unconventional insights from history tell a different story.
In this article
Share this article
The well-known and most-respected long-term average statistic from the stock market is the one provided in the annual compendium published by Morningstar “Ibbotson Stocks, Bonds, Bills, and Inflation Classic Yearbook.” Consultants, financial analysts, advisers and investors seeking a benchmark for long-term stock market returns reach for this annually revised testament of historical financial market data. [Editor’s note: This book can be found at many public libraries.]
The number that everyone seeks in the book is the long-term average return from the stock market, which is near 10%. Conventional wisdom believes that any number representing more than 80 years of history must be a valid indication for the next decade or two. Everyone knows that the stock market has ups and downs, yet 80 years is certainly enough time to produce a valid measure for the average condition, right? Well, actually not.
The three components of stock market returns are dividend yield, earnings growth, and the change in the price-earnings ratio; any other elements will fall within one of these three components. The discussion of the historical data in the Ibbotson yearbook provides the details for all three components and the insights needed to fully appreciate the “Average” (capitalized to acknowledge its aura as a presumed market truism).
To read more, please become an AAII member or CLICK HERE.