neously transmitted and simultaneously broadcast around the world.
Yet despite mammoth changes in the basic factors generating wealth for
shareholders, equity returns have shown an astounding stability.
Short-Term Returns and Volatility
The bull market from 1982 through 1999 gave investors an extraordinary
after-inflation return of 13.6 percent per year, which is double the histor-
ical average. This constituted the greatest bull market in U.S. stock mar-
ket history. The superior equity returns over this period followed the
dreadful stock returns realized in the previous 15 years, from 1966
through 1981, when the real rate of return was –0.4 percent. Neverthe-
less, this bull market carried stocks too high, as total real returns in Fig-
ure 1-4 reached 81 percent above the trend line. The subsequent bear
market and recovery have brought stocks, as of the end of 2006, near
their long-term trends.
REAL RETURNS ON FIXED-INCOME ASSETS
As stable as the long-term real returns have been for equities, the same
cannot be said of fixed-income assets. The nominal and real returns on
both short-term and long-term bonds are reported in Table 1-2 covering
the same time periods as in Table 1-1. The real return on bills has dropped
precipitously from 5.1 percent in the early part of the nineteenth century
to a bare 0.7 percent since 1926, a return only slightly above inflation.
The real return on long-term bonds has shown a similar pattern.
Bond returns fell from a generous 4.8 percent in the first subperiod to 3.7
percent in the second, and then to only 2.4 percent in the third. If the re-
turns from the last 80 years were projected into the future, it would take
32 years to double one’s purchasing power in bonds and nearly 100
years to do so in Treasury bills. In contrast, it takes about 10 years to dou-
ble purchasing power in stocks.
The decline in the average real return on fixed-income securities is
striking. In any 30-year period beginning with 1889, the average real rate
of return on short-term government securities has exceeded 2 percent
only three times. Since the late nineteenth century, the real return on
bonds and bills over any 30-year horizon has seldom matched the aver-
age return of 4.5 to 5 percent reached during the first 70 years of our
sample. From 1880, the real return on long-term bonds over every 30-
year period has never reached 4 percent, and it has exceeded 3 percent
during only 22 such periods.
14 PART 1 The Verdict of History