Er? Looking at Shiller's data and adjusting for dividends and
inflation, it appears I would have gotten almost 9000% return (Jan. 1929
to June 2004).
Er (again)? Same data set (this time starting in Jan. 1905) tells me I
would have lost 24% of my total return over the 5 years ending June
2004. Substantial, but not 80%.
If you invested in January 1966 (the high point of the year) you would
have been back to even by August of 1967. Perhaps you're thinking of
the 70's bear market? Investing in Jan. of '73 (the top) was a harsh
reality, not breaking even until Jan. of '85.
Don't forget to check my math,
No. A 30 year period. The OP can't expect to invest at the beginning
of his career in 1929, and take his money out in June 2004-- that would
be a working life of 85 years. Rather I am assuming invest in 1929,
and retire in 1959.
The point being that whilst stocks have been a winner, one cannot
guarantee the kind of returns over the next 30 years that have taken
place over the last 30 years.
This is the paradox of stocks and compounding. You compound *down* as
well as up. You have more money, but a bear market therefore hits you
harder. The advocates of stock investing always assume positive
returns-- a good assumption, but not a certain one.
Without checking, my memory of the market fall from September 1929 to
I though the Dow peaked in 1966, and did not again return to the over
1000 level until 1979. At which point inflation would have reduced
your returns by a further 40% or so (might be more).
I don't have the data to hand to check that.
Perhaps you're thinking of
See above. Except on the third point, we weren't really talking on the
Ah, this was not clear (to me) from your post, sorry about that.
Nevertheless the return (again from Shiller's data) from Jan. 1929 to
Jan. 1959 was still 558%, or 6.5% annualized after inflation - very near
the long term market average.
Sorry about that again. But during this time period, the market (from
Shiller's data) gave up only 11% of the gains made in the 25 years
preceding Sept. 1929, adjusting for dividends and inflation.
It did peak in 1966, but returned to that peak in 1968, adjusting for
Have I mentioned how much I love Shiller's data (though the last
sentence wasn't from his data...)?
OK that is much closer to what I recalled.
The point about compounding holds. *negative* return periods can hurt
as much as positive ones help.
The OP was fortunate enough to make early investments, I would guess,
in the 1970s. The stock market has never performed as well over a 30
year period as it has since 1979.
However, counting inflation, it had an absolutely torrid time
beforehand-- 1968-1979. Something like a 60% drop, I think?
One of the big factors in previous times of stock market return has
been the impact of dividends. Accounting for as much as 2/3rds of all
stock returns over the 100 year period (about 60% in the US, I
Now, with dividend yields hovering around 2%, it is much less clear
that those dividends will be such a big factor in returns going forward.
Sure it has (assuming that I understand your statement above - I don't
have a very good track record on that...). Thirty year periods
(adjusting for dividends and inflation) beginnning in 1979 and later
returned 7% to 8% annually, until you get into the 30 year periods
ending after 2001 (where the returns go lower). But 30 year periods
ending in 1961 through the early 70's had 8% to 11% annual returns.
Periods ending in the mid-50's had 7% to 8% returns. ~7% returns for 30
year periods ending in the late 20's. Periods ending in the early
1900's had 7% to 9% annual returns. Admittedly the 90's bull market had
impressive single year gains that we should not expect to be repeated,
but we had a nice bear market afterwards and plenty of years of high
inflation before to temper the 30-year perspective.
More like 30% (adjusting for dividends).
This may be true over the next 10 years, but if you're looking out 30
years, I think this is a pretty shaky statement. Of course, if you had
stated the opposite (i.e. dividends will be a huge factor going
forward), that would be equally shaky.
I understand your point that the future may not resemble the past. But
30 year returns have been pretty stable. Using the 90's as an indicator
of future stock market investing success would seem to put one on the
road to disappointment. But to throw the baby out with the bath water
(or the equities out with the bull market), seems a bit too doomsdayish.
1. 'the power of compounding' works both ways: if you have negative
returns, your portfolio takes the hit. This is the problem with the
blithe assertion (made mostly by financial planners seeking to sell me
stuff) that all you need to do is sit back and get rich, or that
compounding is the solution to all evils.
The good news is that whilst 1929 and 1999 were lousy times to invest,
2007 doesn't look anything so horrific, even if markets might drop 30%
tomorrow (assuming a major event like a war with Iran).
2. equity returns tend to be positive over the long haul. In fact,
'excessively' so relative to their risk levels (volatility)-- this is a
puzzle in financial market theory and *likely* results from the fact
that investors are excessively adverse to capital losses (so they don't
hold as much equities as they should).
This may be the source of the stability of 30 year returns.
US - 6.3% real return 1900-2002. If inflation is 2.5% pa going
forwards, then this is consistent with a 9% nominal return.
US, Canada, Australia and Denmark never experienced negative 20 year
real returns. Of course taxes completely muck up this calculation (tax
deferred accounts weren't around for much of this period). And I
wonder what the situation was in Denmark during the Nazi Occupation--
is it meaningful to speak of an equity return then?
3. if you start at a lower yield basis, it's hard to catch up. From a
5 or 6% yield (I am not sure what the SP500 yielded in 1976, but I
believe it was around that level), you can see that even if the market
does well, dividends are going to be a decent slug of your return.
This is much less true from 2%. Even if dividends grow quickly.
*unless* somewhere in there we have a stockmarket slump that brings
dividends back to their historic level.
I'd have to sit and do the math, but if we assume that dividends rise
by 5% pa, over that time, the yield basis of the market only doubles
every 14 years, so in that period your dividends have risen by 4 fold,
but (assuming 8% pa return) your portfolio has risen by 10 fold.
4. the best predictors I know of returns (long run) for asset classes
- real return of equities: inverse of the normalised PE for the stock
market. So if the SP500 is on 15 times PE right now, then 6.7% real
(big argument what constitutes a 'normal' PE given the market is always
either headed into a slump, or coming out of one (by definition)).
- nominal return of bonds: their current yield to maturity (about 4.6%
- real return bonds: their current real yield (ie TIPS in US)
I think Brenan on the Vanguard website had a piece on this. I am quite
comfortable that those are reasonable forecasts for future returns.
Dimson uses slightly lower (see the piece I quoted and his book) at 5%
real. He finds a 20% chance of a negative real return on a 20 year
holding period, and a 6% chance on a 40 year period.
Well, if the S&P drops by 30% tomorrow, you're almost to the point where
it dropped from 1999 - 2003 (dividend adjusted). But I guess your point
is that the markets don't look as overvalued as they did in '29 or '99
by certain measures?
As Shiller points out in _Irrational Exuberance_, this is not true. The
20 year period ending in 1921 experienced a negative (barely) overall
real return. He points out that after taxes, there are a few more 20
year periods with negative real returns. For what it's worth, Siegel in
_Stocks for the Long Run_ looks at the long term stock market results of
several countries including Germany during the Nazi era. I don't
remember if he looked at Denmark, though. I was surprised to see that
both the German and Japanese stock markets recovered nicely after WWII
(you could have held all the way through - if you had a long enough
horizon), while their bonds went in the crapper (not surprising). This
is one of the effects that leads Siegel to claim that stocks are safer
than bonds over the long term.
Here you're making the assumption that dividend yield is a necessary
part of total return. Some would say that a low dividend yield would
necessarily lead to higher capital gains as the total return should be
somewhat stable. I won't go that far, but I do note that 30 year real
returns, adjusted for dividends, are not correlated to the dividend
yield at the beginning of the 30 year period (again using Shiller's
data). And while dividend yields are remarkably low right now, dividend
growth is also very high (up to 15% in 2004).
Yes I should have been clearer. There is nothing like the 'irrational
exuberance' out there *although* there are some troubling
vulnerabilities in the financial system (specifically the complexity of
the interrelationships between the banking system, hedge funds, LBO
loans, collateralised debt and credit default swaps) and perhaps a
sense of complacency (extremely low volatility).
(other areas of risk would be commodity prices and real estate prices).
Commodities we know what is happening. Historically, you could make
money in commodities from the backwardation (the futures price is
normally lower than the spot price by more than the interest cost over
the time period), so by holding a basket of commodity futures, you make
steady money on the 'roll'. Steady money, and uncorrelated with stock
Unfortunately, enough studies have shown this, so that big money from
institutional investors has been shifted into commodities (and a lot of
speculative money). At which point, commodities are now in contango
(futures price higher than spot price) and the 'roll' is a money loser.
I guess Dimson and Shiller are using different indices. Without doing a
bit of digging I am not sure why. Dimson does state he is using data
that is about 0.5% pa lower in returns than the usual (which makes the
disagreement even more surprising-- one would expect Dimson's data to
be more pessimistic).
For what it's worth, Siegel in
I guess the question of confiscation comes to the fore. Certainly if
you were Jewish, you weren't around to get your stock back (the source
of the Swiss lawsuits now). But I'm not sure if you were the average
German mutual fund holder (assuming they had such things) you had your
property returned to you. Certainly not in East Germany.
The real killer is hyperinflation. Your holdings can be reduced to
worthless. Equities *should* be proof against this (providing you
don't sell them to eat) but then of course there are the recurrent
governance problems from emerging markets. Most notably Russia (the
managers simply steal the assets of the company) but also China (your
partner is a government which does what it wants).
The argument there is that for tax reasons, companies now buy back
shares (which used to be almost illegal in the UK, and still is I
believe in some countries) rather than pay dividends directly. It's
not a bad argument, although I have seen studies that show that far
more companies announce buybacks than actually execute them-- it often
has more to do with dilution due to executive share options than with
Most analysts seem to adjust the market yield for buybacks by about
0.5%. ie an SP500 yielding 2.0% would be 2.5% like-for-like.
I won't go that far, but I do note that 30 year real
I was simply noting Dimson's research (elsewhere) that over half the
return from holding stocks in the long run is the dividend. Now this
has all sorts of issues: 1. tax would have therefore killed your
returns for much of the century (taxation on dividends was as high as
90% in some times in UK history) 2. there's no way that can be true in
the future, starting at a yield of 2% *unless* as you point out, you
get extraordinarily high dividend growth going forward.
Interesting point about yield and returns.
And while dividend yields are remarkably low right now, dividend
Thanks for your data corrections. I am surprised at a couple, will
have to add the book to my reference list.
Particularly surprised about the 1929-1935 data. My own memory was
that if you invested in 1929, it was in the 1950s before you recovered
Well, you're right, if you ignore dividends and inflation (in other
words, you're looking just at an index without dividend adjustment).
But this was a very low inflation period overall (with a long period of
deflation) and, as you pointed out in another post, the return from
dividends was high.
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