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NATIONAL CENTER FOR POLICY ANALYSIS
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| The Future of Equity Returns |
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Equities have historically been a successful form of investment, earning 6 percent more interest over cash investments and 5 percent more interest than bonds. However, this may not be the case in the future. However, some analysts argue demographic trends portend a weakening of equity returns.
Equity investments have been extremely profitable over the course of the 20th century:
- The long-run annual real return on equities in the United States and the United Kingdom was 6 or 7 percent.
- At this rate, the invested money would double in 10 years.
- If an investor constantly re-invested dividends over the course of a century, the value of the equity portfolio would climb 1,000 times.
Equity returns come from two main sources: the dividend yield itself and the growth of dividends. Dividend growth depends on growth in profits, or "world output." Over the course of the twentieth century, world output skyrocketed, rising 3 percent a year instead of 1 percent annually as in previous centuries. This is what accounted for the high returns of equities.
However, demographics may end this trend:
- In the twentieth century, population growth was rapid.
- Despite the millions killed in two world wars, the population of the advanced industrial nations was higher in 1945 than in 1914.
- By contrast, in the 21st century, industrial nations will confront population decline.
- The populations of Japan and Europe are set to fall by a quarter in each generation if current fertility rates continue.
As the working age population shrinks, world output will stagnate, thus weakening equities' profitability. There is, however, one hopeful possibility. If immigrants were to replace those aging workers, then world output need not stagnate.
Source: Tim Congdon, "The Century of Equity Investment," Journal of the Institute of Economic Affairs, Volume 22, No. 2, June 2002.
For IEA information
http://www.iea.org.uk/record.php?type=release&ID=39
For more on Stock Markets
http://www.ncpa.org/iss/eco/
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