Over the past few days I have been involved in exchanges of views with two totally different groups on the subject of long term investment returns. First an internet poster, describing himself as a professional portfolio investor, insisted that all would soon be well in the US economy and markets since financial asset returns would rapidly return to the normal long term rate of increase of ~12% per year. Although I personally had returns over 13% per year from early 2003 to early 2007, I knew that his claim was impossible over any long term.
Then I received an email from someone I've known for well over a decade as a fellow long economic wave enthusiast, and from whom I get occasional emails addressed to me and a larger group of investors and market historians. His comments were based on long term asset return research some of which done as long ago as thirty years ago and hence quite relevant to the issue:
" There is NO Support in long term economic history for the current inflated expectations of what "invested capital" should return to the capital holder for the mass of invested capital!! An "exceptional investment" "might" get you a normalized, ie: over the course of an entire business cycle real return of about 5% to 7% for a short period, but only in a new technology industry .. and not for long in that industry, probably only 10 to 20 years max. These assumptions that everybody has been using over the last few years that they can obtain investment returns on large pools of invested money of 8%, with inflation running at 2%, over a long period of time are and always have been pie in the sky dreams imo."
Greatly stimulated by both people, I started looking at data I have at hand. Using the FastTrack® total return (reinvested dividends, no tax) data base for mutual funds, closed-ends, and ETFs, several Vanguard stock and bond and money market funds were charted for the twenty year period from April 9, 1989 to Friday, April 9, 2009. This period was a favorable period for both US stocks and bonds generally, and for new technology era returns which my friend's email correctly isolated as "special situation" gains before the new technology becomes a commodity.
Vanguard's S&P500 Index Fund had total returns of 7.64%, their Total Bond Market index returned 7.11%, and their Prime Money Market Fund 4.44%. Using US Bureau of Labor Statistics data, the US CPI annualized compound increase was 2.7225 % per year for the same period. And no tax was deducted and no the income withdrawn. Thus the S&P500 returned ~5% after inflation and before tax, with two bond funds just slighly less, and the Prime Money Market Fund ~1.7% after inflation. The Vanguard tax-free municipal money market returned an annualized twenty year return of 3.15% which for someone in a combined 30% tax bracket would be equivalent to 4.5%, and after inflation about the same as the taxed money market fund, as one would expect. (I use Vanguard funds instead of indices for my work because Vanguard has very low costs but their experience does reflect rational "slippage" and execution costs in the real world.)
Then I remembered a very long term chart of real (inflation-adjusted) asset returns I had archived. This chart's data beginning in the year 1800 and running to 2002. I do not recall precisely where this came from, but I believe Professor Jeremy Siegel of the Wharton School and WisdomTree Funds put it together from unknown data sources.
Using the 202 year investment period starting in 1800, the real total return annualized for US stocks was 6.67% per year, with 3.51% for bonds, 2.87 for 91 day bills, 0.09% for gold, and -1.31% for US dollar cash.
This fine chart and its data confirm the opinion of many long term investors on relative gains of these various assets. Cash is generally not a good investment except during periods of deflation. Gold is a wealth preservation asset and protects cash from its loss over time, but during very long periods it may be very quiet indeed. In fairness to gold, it appears that gold may have been close to $7 on the chart above in 1980, and let's say it is $7 today as well. That would give gold an annualized real return of o.94% since 1800, just under 1%, the point with gold being that it doesn't get you rich, but it can keep you rich in inflationary or dangeous political times.
As we who lived through the past 20 years as investors would have suspected, stocks underperformed their very long term real annualized returns by about 1.75% per year and bonds outperformed their very long term real annualized by about 1.25%. Bonds were in a bull market from 1981 to present while stocks have had some very nasty bear markets after a bull market from 1982 to 2000.