Blog - Investing Notes
December 16, 2004 – The (Not Too) Optimistic?
In a "do not quote" December 2003 article entitled "Irrational Optimism", the authors of Triumph of the Optimists caution investors regarding unrealistic expectations for long-term stock market returns. Without quoting them, we note a few of their highly empirical conclusions:
- The equity premium will decline in the future, with real returns from stocks lower in the 21st century than they were in the 20th.
- A reasonable expectation for real annual returns from stocks is 5%, representing a risk premium of 3%.
- Diversification, across countries and asset classes, is important to mitigate the volatility risks of specific stock markets.
In summary, don't think big for long-term stock market gains.
For other research on the equity risk premium, see Blog Synthesis: The Equity Risk Premium and Other Investing Benchmarks.
