overwhelming, sum of money to the industrialists and landholders of
the early nineteenth century.^9 But total wealth in the stock market, or in
the economy for that matter, does not accumulate as fast as the total re-
turn index. This is because investors consume most of their dividends
and capital gains, enjoying the fruits of their past saving.
It is rare for anyone to accumulate wealth for long periods of time
without consuming part of his or her return. The longest period of time
investors typically hold onto assets without touching the principal and
income occurs when they are accumulating wealth in pension plans for
their retirement or in insurance policies that are passed on to their heirs.
Even those who bequeath fortunes untouched during their lifetimes
must realize that these accumulations are often dissipated in the next
generation or spent by the foundations to which the money is be-
queathed.^10 The stock market has the power to turn a single dollar into
millions by the forbearance of generations—but few will have the pa-
tience or desire to endure the wait.THE LONG-TERM PERFORMANCE OF BONDS
Bonds are the most important financial assets competing with stocks.
Bonds promise fixed monetary payments over time. In contrast to eq-
uity, the cash flows from bonds have a maximum monetary value set by
the terms of the contract. Except in the case of default, bond returns do
not vary with the profitability of the firm.
The bond series shown in Figure 1-1 are based on long- and short-
term U.S. Treasury bonds, when available; if they were not available,
other highest-grade municipal bonds were chosen. Default premiums
were removed from all interest rates in order to obtain a comparable se-
ries over the entire period.^11
The interest rates on long-term bonds and short-term bonds, called
bills, over the 200-year period are displayed in Figure 1-2. Interest rate
fluctuations during the nineteenth and early twentieth centuries re-CHAPTER 1 Stock and Bond Returns Since 1802 7
(^9) Blodget, an early-nineteenth-century economist, estimated the wealth of the United States at that
time to be nearly $2.5 billion so that $1 million would be only about 0.04 percent of the total wealth:
S. Blodget, Jr., Economica, A Statistical Manual for the United States of America, 1806 edition, p. 68.
(^10) One of the world’s largest foundations, the Bill and Melinda Gates Foundation to which Warren
Buffett has left the bulk of his money, has announced that all of its money must be spent within 50
years of their deaths.
(^11) See Jeremy Siegel, “The Real Rate of Interest from 1800–1990: A Study of the U.S. and the U.K.,”
Journal of Monetary Economics, vol. 29 (1992), pp. 227–252, for a detailed description of the process by
which a historical yield series was constructed.