The Rate of Return on Everything, 1870–2015

[wolf]

It is a very interesting study about returns on various asset classes, as the title says. Many figures, data, etc. They have also analyzed the real return for home prices. It could be useful for different kind of scenarios.

FEDERAL RESERVE BANK OF SAN FRANCISCO - WORKING PAPER SERIES

The Rate of Return on Everything, 1870–2015

Free download:
https://www.frbsf.org/economic-research ... 017-25.pdf

[7Wannabe5]

Very interesting. My take away is that I should maybe diversify my real estate holdings internationally by purchasing some more vacant lots across the river in Canada. I will pass along a copy to my super-rich friend the next time my BF drops me off at his house for a play date.

[unemployable]

Most interesting data is on page 22.

I've had it in my head the two best-performing stock markets over measurable history are the US and Australia. This says Finland is the clear #1, then a gap to the US, then a gap to everyone else. But over shorter periods (since 1950 and 1980), while Finland stays #1 it gets murkier after that. I'd say the larger point is you don't necessarily take a performance hit by going global. Other studies universally show that diversifying across countries reduces your volatility.

I can think of several reasons for post-1950 to be higher than all-time, and post-1980 to be higher still. P/E expansion is the most obvious. Another is the global Greenspan put, where developed countries have bailed out their stock markets during and after crises. Investors pricing in the latter leads to the former, of course. Increased globalization, where large companies have access to basically the entire world now, is probably another factor.

[Lucky C]

If Figure 6 on page 20, if we were to extend it to today's high equity (mainly in the US) and high housing prices (in the US and other places), we would be in a similar spot as the late 1920's, mid 1960's, and late 1990's. Not a big surprise there as those were times of the highest CAPE levels and the worst times to retire with a portfolio of mostly US equities.

If history is a guide we should not be surprised for 10-year equity returns to drop back down close to or below 0% in the next bad bear market, but housing returns should be less severe. However notice in the next figure that correlations do rise between equities and housing in these bad bear markets. So, I expect the end of this bull market to be followed by very severe equity losses, and less severe housing losses.

Regarding Finland, though it has been great in the past, it is currently near the bottom of Star Capital's global ranking system (but still much cheaper than the US).
https://www.starcapital.de/en/research/ ... valuation/

[jacob]

The inflation-adjusted peak-to-peak (2000 and now 18 years later) returns for the S&P500 is about 1.8%/year (w/o dividends, but those are just a few percent), so that's a reasonable confirmation that high valuation => low growth expectation rate.

These low average growth rates seem more likely to be achieved by large drops followed by recoveries; something that's hard to imagine in these low-volatility years.

[unemployable]

The inflation-adjusted peak-to-peak (2000 and now 18 years later) returns for the S&P500 is about 1.8%/year (w/o dividends, but those are just a few percent), so that's a reasonable confirmation that high valuation => low growth expectation rate.

You can't ignore dividends, especially if you're in some sort of vehicle (retirement accounts) that reinvests them.

SPXT high in September 2000 was 2108; now it's at 5436; call that 17.3 years later. Everyone thinks of the highs as being in March, but lots of large-caps didn't peak until later that year.

(5436 / 2108) ^ (1/17.3) = 1.0563 = 5.63% nominal total return

CPI-U was 246.5 for Dec 2017 and 167.9 in Sep 2000

(246.5/167.9) ^ (1/17.25) = 1.02251 = 2.25% annualized

1.0563 / 1.02251 = 1.03305 = 3.3% real total return. Dividends have been roughly half of this.

Someone else can calculate the return since March 2000; it might change the digit after the decimal point but won't drop it all the way to 1.8%.

An investor who reinvests dividends would probably come out a bit ahead of this, even net of fees, because dividends (1-2%) have been less than capital appreciation (greater than 5.63%)

That said, if you bought at the top you certainly underperformed the long-term real return of the stock market (6-7%). I suspect bonds over the same time would have done worse, closer to a zero real return, and real estate in most of the US better.

Sources: SPXT, CPI

[Lucky C]

Just compared total returns of Vanguard Total Bond fund vs. S&P500 from the 2000 peak. The S&P500 surpassed the bond fund on a total return basis from the 2000 peak just last year, but through 2016 you would have been better off with just bonds.

[Stahlmann]

Is in this contained some kind of "thinking"?

Like II War -> goverment increases spending -> high returns (I assume that). After II War -> help from other countries -> high returns (honestly something deeper like returns in specific would in-in-in-in-invaluable")? If not where I can find answer for this question?

I know this is "creating massive massive value" (who would own this probably wouldn't share, but somebody must have written somethin on this... Like ,,charity is givinig away "what has been" stolen from "workers" during lifetime, just to sound cool before death (in case of super super rich".

Or is this just book with massive tables and practically only with numbers?

[oldbeyond]

It was very surprising to me that housing offered returns in the high single figures, holding true for different countries and time periods. I would've thought real returns to be much lower, a couple of percent real perhaps.

[ThisDinosaur]

+1 oldbeyond
I'm not sure how to square that with all the times I've read that the long term trend in real estate is to just match inflation. Now, if you assume property doesn't depreciate, and you can charge an inflation adjusted rent, then I could see a real return. But that return couldn't exceed the growth of the rest of the economy (which should match the stock market on average) because that would imply rent was growing over time as a percentage of people's spending.

[Mister Imperceptible]

I would suspect that it is the capital appreciation of housing that merely tracks inflation, and the rental income that drives real returns, in the same way that dividends provide much of the real return from stocks. This makes sense to me, as people take the money they earn and plow it into where they want to live.

And rent IS growing as a percentage of spending. That’s part of the growing inequality.

[noskich]

How to get 7% ROI passively nowadays? Any ideas or advice please? Thanks.

[7Wannabe5]

1) Daffodils: After year 2.

2) Quagga mussels: Almost immediately.

[Mister Imperceptible]

I can attest to 7wannabe5’s advice, I’ve done very well with quagga mussels, I already have 8 Lamborghini’s and 1 Subaru station wagon thanks to that incredible opportunity. But it’s fleeting as an investment vehicle so you better hurry.

[TheFIminator]

Good and interesting article. There are a lot of statistics you can find over long periods of time. However, my belief is that we dont know what the future brings. So I base my investments on the numbers at hand and if appreciation occurs, that is a bonus. I am more about the cashflow to fund my FIRE than anything else that I dont have control over.

[TomBombadil]

@Mister Imperceptible pointed me here, as I opened a new thread on the article.

There is a new version from this March here:
https://economics.harvard.edu/files/eco ... s28533.pdf

[Tyler9000]

Thanks for the link. I'm always looking for new data sources, and I've had my eye on this for a while now.

FYI -- the guy who manages the Simba Spreadsheet has been working with the authors of this paper on getting access to the source data. For some reason they have only published price returns (without dividends) which isn't very useful, but supposedly they're working on the total returns. If they can come through, this is a hugely useful resource.