traordinary changes in the economic, social, and political environment
over the past two centuries, stocks have yielded between 6.6 and 7.0 per-
cent per year after inflation in all major subperiods.
The wiggles on the stock return line represent the bull and bear
markets that equities have suffered throughout history. The long-term
perspective radically changes one’s view of the risk of stocks. The short-
term fluctuations in the stock market, which loom so large to investors
when they occur, are insignificant when compared to the upward move-
ment of equity values over time.
In contrast to the remarkable stability of stock returns, real returns
on fixed-income assets have declined markedly over time. In the first
and even second subperiods, the annual returns on bonds and bills, al-
though less than those on equities, were significantly positive. But since
1926, and especially since World War II, fixed-income assets have re-
turned little after inflation.
INTERPRETATION OF RETURNS
Long-Term Returns
The annual returns on U.S. stocks over the past two centuries are sum-
marized in Table 1-1.^15 The shaded column represents the real after-in-
flation, compound annual rate of return on stocks. The real return on
equities has averaged 6.8 percent per year over the past 204 years. This
means that purchasing power has, on average, doubled in the stock mar-
ket about every 10 years. If past trends persist—that is, if inflation aver-
ages 2^1 ⁄ 2 percent per year and equities offer a 6^1 ⁄ 2 percent forward-looking
annual real return—this increase in purchasing power would translate
into about a 9 percent per year nominal or money return on stocks.
Note the extraordinary stability of the real return on stocks over all
major subperiods: 7.0 percent per year from 1802 through 1870, 6.6 per-
cent from 1871 through 1925, and 6.8 percent per year since 1926. Even
since World War II, during which all the inflation that the United States
has experienced over the past 200 years occurred, the average real rate of
12 PART 1 The Verdict of History
(^15) The dividend yield for the first subperiod has been estimated by statistically fitting the relation of
long-term interest rates to dividend yields in the second subperiod, yielding results that are closer to
other information we have about dividends during the period. See Walter Werner and Steven Smith,
Wall Street, New York: Columbia University Press, 1991, for a description of some early dividend
yields. See also a recent paper by William Goetzmann and Phillipe Jorion, “A Longer Look at Divi-
dend Yields,” Journal of Business, vol. 68, no. 4 (1995), pp. 483–508, and William Goetzmann, “Patterns
in Three Centuries of Stock Market Prices,” Journal of Business, vol. 66, no. 2 (1993), pp. 249–270.