The chart below was created using S&P 500 returns dating back to 1871. (This uses widely-accepted methodologies to re-create returns for the earlier years.) I looked at nominal returns vs real (i.e. inflation-adjusted) returns, according to CPI calculations.
Each point on the lines below represent the average 3yr annualized return over the previous 20yrs. I did this so we can observe whether trends change over long periods of time. Indeed they do.
A couple observations:
1. Inflation-adjusted returns tend to be significantly below nominal returns. Be sure to remember this difference when you’re investing your hard-earned money.
2. Both nominal and real returns rose significantly since WWII. I wonder if this can be attributed to the massive growth in credit and consumerism since WWII. Leverage will always amplify returns on equity, so this might be the case. What is clear is that returns fluctuate over long periods of time and that the averages used today to calculate returns expectations (by pension funds, for example) may be based on skewed data – particularly if they are based on less than 50 years of data. Strip out the last 50-or-so years and the world looks like a vastly different place.
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