Financial Market Returns From 1802 (Stocks For The Long Run)

This chapter analyzes the returns on stocks and bonds over long periods of time in both the United States and other countries. This two-century history is divided into three subperiods. In the first subperiod, from 1802 through 1871, the U.S. made a transition from an agrarian to an industrialized economy, much like the "emerging markets" of Latin America and Asia today.5 In the second subperiod, from 1871 through 1925, the U.S. was transformed into the foremost political and economic power in the world.6 The third subperiod, from 1926 to the present, contains the 1929-32 stock collapse, the Great Depression, and postwar expansion. The data from this period have been analyzed extensively by academics and professional money managers, and have served as a benchmark for historical returns.7 Figure 1-1 tells the story. It depicts the total return indexes for stocks, long- and short-term bonds, gold, and commodities from 1802 through 1997. Total returns means that all returns, such as interest and dividends and capital gains, are automatically reinvested in the asset and allowed to accumulate over time.

It can be easily seen that the total return on equities dominates all other assets. Even the cataclysmic stock crash of 1929, which caused a generation of investors to shun stocks, appears as a mere blip in the stock return index. Bear markets, which so frighten investors, pale in the context of the upward thrust of total stock returns. One dollar invested and reinvested in stocks since 1802 would have accumulated to nearly $7,500,000 by the end of 1997. Hypothetically, this means that $1 million, invested and reinvested during these 195 years, would have grown to the incredible sum of nearly $7.5 trillion in 1997, over one-half the entire capitalization of the U.S. stock market!

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One million dollars in 1802 is equivalent to over $13 million in today's purchasing power. This was certainly a large, though not overwhelming, sum of money to the industrialists and landholders of the early 19th century.8 But total wealth in the stock market, or in the economy for that matter, does not accumulate as fast as the total return index. This is because investors consume most of their dividends and capital gains, enjoying the fruits of their past saving.

It is rare for anyone to accumulate wealth for long periods of time without consuming part of his or her return. The longest period of time investors typically plan to hold assets without touching principal and income is when they are accumulating wealth in pension plans for their retirement or in insurance policies that are passed on to their heirs. Even those who bequeath fortunes untouched during their lifetimes must realize that these accumulations are often dissipated in the next generation. The stock market has the power to turn a single dollar into millions by the forbearance of generations—but few will have the patience or desire to let this happen.

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