Asset Class Returns

Monday, September 03, 2007 | 09:00 AM


The table above is from this week's Thoughts from the Frontline.  Rob Arnott and John West, of Research Affiliates, note in the full piece (Hope Is Not a Strategy) that any excessive love of US equities has led to relative underperformance.

Here's a quick excerpt:

"Over the past century, dividends have provided over two-thirds of the real returns earned in US stocks. Today, they hover well under 2%, while nominal bond yields are in the 5% range. Simple arithmetic points to 5% returns for bonds and 5-7% for stocks - if their respective yields don't rise in the years ahead! Rising yields and shrinking P/E ratios would mean capital losses which would reduce returns below these levels, much as falling yields and rising multiples fueled the wonderful returns of the past 25 years.

A lot of investors, even professional institutional investors, aided and abetted by their consultants and actuaries, don't like this arithmetic. So, they dismiss it, preferring to forecast the future by extrapolating the past. This is perhaps the worst possible way to construct expectations. It led actuaries to assign very low return assumptions (6% was typical) for pension funds in 1982, at a time when 14% could be locked in with government bonds, and when stocks were producing that same 6% in dividend yield alone, without even allowing for any growth, capital appreciation or inflation, all of which could, and did, add mightily atop that 6% yield. Why such low expectations? Because returns from 1965 to 1982 had been wretched.

Extrapolating the past similarly led to 10% and higher return assumptions at the peak of the bubble in 2000, at a time when bond yields were 6% and stocks were offering a scant 1% yield. Why such high expectations in a world of low yields? Because returns from 1982 to 1999 had been truly extraordinary. In 2000, I wrote a short paper entitled "Death of the Risk Premium," with Ron Ryan, which was received with widespread derision, but ultimately proved correct: plain old 10-year government bonds have produced higher returns than stocks since then, by a cumulative margin of over 30%, despite the durable bull market since 2002. And, even if we include the bubble of 1998-2000, stocks have beaten bonds by well under 1% per year over the past decade."

Interesting stuff.  Go read the full piece . .  .


Hope Is Not a Strategy
John Mauldin
Thoughts from the Frontline, August 31, 2007

Monday, September 03, 2007 | 09:00 AM | Permalink | Comments (6) | TrackBack (0) add to | digg digg this! | technorati add to technorati | email email this post



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there's always a bull market somewhere. happy labor day.

it will be an interesting Q4.

Posted by: johntron | Sep 3, 2007 11:22:54 AM

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