The (Not Too) Optimistic?
Posted in Equity Premium
December 16, 2004
In a December 2003 article entitled “Irrational Optimism”, the authors of Triumph of the Optimists caution investors regarding unrealistic expectations for long-term stock market returns. Their highly empirical conclusions include:
- 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.
