Professor Siegel, in his book “Stocks for the Long Run” showed the stability of stock returns in the long run.
Annual real returns from U.S equities from 1871 to 1996 was 6.8%. This was close to the sum of the median dividend yield plus the real earnings growth over the period (6.51%), with the difference explained by small variations in the P/E ratio (ratio of a company’s price to its earnings).
Jeremy Siegel recently updated his book and demonstrated that after 20 years, stock returns have remained the same, as you can see in the graph above.
Equity returns from other developed countries are close to the returns achieved by stocks from the United States. For instance, Siegel also showed how investment results had been almost as good in Germany and in the United Kingdom as in the United States.
Although it is true that this general knowledge that stocks are very good investments should push stock prices higher (reducing the future yield from stocks), as it has sometimes happened, prices tend to revert to the mean. High valuations have not lasted long as investors have sold stocks as soon as there have been any bad news in terms of short term earnings projections, macroeconomic figures or any kind of political instability.
We can see in the chart above how the P/E ratio of the S&P500 has fluctuated around the 15 times earnings multiple.
Since long term returns for stocks have been much superior to bonds, bills and gold, Vadevalor prefers equities. Many investors are unaware of the risks of fixed income securities.