Investment Returns Spreadsheet
I compiled from a few different sources a set of historical investment index returns from the late 1800s to the early 2000s. To be clear, the amount of work I put into this was only a couple hours. If you want a convenient way to see this data, click here.
I found three estimates of typical stock returns that included annual data from at least 1891 until at least 2012. The three overall averages
Because CPI is biased upwards. If we use the GDP deflator methodology, for instance, these estimates increase by by about 0.5%. This still leaves other forms of bias unaccounted for. Altogether, then, it seems likely that true inflation-adjusted returns have averaged around 7%, maybe a smidge higher.
After accounting for risk aversion, the risk-adjusted estimate is about 0.5pp lower: probably around 6.5%. Assuming you don't use various tax avoidance strategies, the after-tax, risk-adjusted estimate falls by another ~1.4pp (assuming 2% inflation) to a smidge over 5%.
TODO:
- I need to include international financial markets in the analysis. I recall seeing a dataset that cost a lot of money that had international returns going back about a century. I'm not willing to drop thousands of dollars on this, but this suggests that international returns also go back a long time - I just need to find them.
- See also Damodaran
- This paper Fundamental Credit Special has a table of decade-based US corporate bond returns back to 1900 on page 10. They also have a graph that strongly suggests the authors have access to annual returns, but I can't find them on the internet. They claim corporate bonds have averaged 2.2% real annual returns sine 1900. This is barely better than treasury bonds (1.5%), so I doubt non high-yield "junk" bonds are a sensible investment. As a sanity check on their data, they suggest equities have averaged 6.0% real returns, which is virtually identical from the returns given by Macrohistory. The other data I found on the topic was a graph of overall bond yields going back to 1926 When will we get back to average market returns. I've included that data (transcribed to numeric form) in the aforementioned spreadsheet. It generally also finds quite low returns (~2.5%), which confirms my general feeling that bonds are a poor investment.