Real Long-Term Returns

Today we’re looking at real, meaning after inflation, long-term total returns. Inflation has averaged 3% per year since the mid-1920s and that adds up to take a big bite out of returns.

According to the Ibbotson Yearbook, real long-term total returns for large-cap stocks have increased 275-fold since 1925. Annualized, that comes to 6.67%. That means that your real investment in large-cap stocks has doubled, on average, every 10.75 years.

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Long-term government bonds have averaged 2.64% per year. Note that 10-year TIPs currently yield -0.68%. Long-term real Treasury bills have averaged a scant 0.55% per year.

From the chart above, you can see that the market has swung wildly from its long-run averages. In 1981, both real bills and real bonds had shown negative returns since 1925. After 1981, both started to take off, but bills turned negative starting in 2002.

As of December 2012, the real return of large-cap stocks was below its peak from 2000. That’s not unprecedented. Large-cap stocks also had a real negative return from August 1963 to July 1982, and from August 1929 to June 1949. Those are pretty long stretches.

Posted by on April 4th, 2013 at 10:59 am


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