Study: The Rate of Return on Everything, 1870-2015

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SimpleGift
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Study: The Rate of Return on Everything, 1870-2015

Post by SimpleGift » Wed Aug 16, 2017 1:05 am

Well, not quite everything, but stocks, housing, bonds and bills worldwide. What’s unique about this new paper is that the researchers have assembled total return data on housing (as an investment, including rental income and capital appreciation) for 16 advanced countries over a nearly 150-year period. They have also improved on the existing global return series for stocks, bonds and bills, extending the coverage to more countries and years. A couple of key findings:

1) Residential real estate (as rental investment) actually outperformed global stocks since 1870. Housing beat stocks mainly because returns were less than half as volatile (chart below). Thanks to compounding, this created a performance gap of more than 2% per year. Also, net rental income historically accounted for more than half of the total housing returns. The rental income returns were greater than the stock dividend returns, which explained much of housing’s outperformance over the nearly 150 years.

2) The risk premium of risky asset returns (equity and housing) over safe asset returns (bonds and bills) is generally lower today than historical average. One interesting finding was that when risk premiums are low like today (in red below), financial crises become more likely — due to the mispricing of risk — and vice versa. For example, between 1946 and 1973 when global risk premiums were above 8%, there was not one systematic banking crisis in their entire 16 nation sample.
  • Image
    NOTE: These are real, inflation-adjusted returns and premia.
    Source: Jorda et. al.

DISCUSSION: There's a huge amount of material in this paper, much of it new and not yet peer-reviewed — especially the residential real estate return series. But for enthusiasts of historical asset returns, there’s much to scrutinize and ponder, about the long-term returns on capital, about GDP growth, about risk premiums, and about risky and safe global asset returns over the past 150 years. Comments on this paper?
Last edited by SimpleGift on Tue Jun 12, 2018 11:53 pm, edited 2 times in total.
Cordially, Todd

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Re: Study: The Rate of Return on Everything, 1870-2015

Post by msk » Wed Aug 16, 2017 1:28 am

For those interested in loooong term returns I would heartily recommend the tome "Capital in the 21st Century" by Thomas Piketty, possibly one of the greatest new references for economists. His findings: Productive Real Estate paid 4% real terms p.a. while Trade & Industry paid a percent to two higher, over a period of >300 years. He does not say much about bonds because they are basically a product of fiat currencies that did not exist a 100+ years ago. Inflation was next to nil for centuries (before the invention of fiat currencies). I am still uneasy with equating stock market returns in recent decades with "Trade & Industry" because of various frictional factors (like corporation tax) but when I checked the numbers for 1966 to 2016 I found that the SP500 compounded @6.6%, with a 3.1% dividend yield and inflation compounded at 4% p.a (i.e. approximately 5.7% real terms). Seems that Piketty's findings of >5% real for Trade & Industry (=stocks less friction?!) did continue through those recent 50 years too. Currently inflation is lower, so we would expect that trends react automatically...
Last edited by msk on Fri Dec 22, 2017 3:18 am, edited 1 time in total.

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Re: Study: The Rate of Return on Everything, 1870-2015

Post by AlohaJoe » Wed Aug 16, 2017 1:48 am

Simplegift wrote:
Wed Aug 16, 2017 1:05 am
1) Residential real estate (as rental investment) actually outperformed global stocks since 1870. Housing beat stocks mainly because returns were less than half as volatile (chart below). Thanks to compounding, this created a performance gap of more than 2% per year.
I sometimes wonder if the "housing bubble" might not be a bubble after all but simply the bidding up of an asset to drive down its future expected returns to bring It in line with other assets. That is, perhaps housing was underpriced for the past ~130 years and now it is "correctly" priced (or at least "more correctly priced").

The paper has lots of other interesting tidbits; thanks for sharing.
Viewed from a long-run perspective, it may be fair to characterize the real safe rate as normally fluctuating around the levels that we see today. The puzzle may well be why was the safe rate so high in the mid-1980s rather than why has it declined ever since.

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Re: Study: The Rate of Return on Everything, 1870-2015

Post by TheBogleWay » Wed Aug 16, 2017 2:18 am

So... are you more well off investing in stocks like a lazy 3 fund portfolio, or likely to be more well off buying and renting out houses lol. How about some laymens terms ;)

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Re: Study: The Rate of Return on Everything, 1870-2015

Post by IMO » Wed Aug 16, 2017 2:19 am

Interesting paper.

Conclusion included:

"The returns to risky assets, and risk premiums, have been high and stable over the past 150 years, and substantial diversification opportunities exist between risky asset classes, and across countries. Arguably the most surprising result of our study is that long run returns on housing and equity look remarkably similar. Yet while returns are comparable, residential real estate is less volatile on a national level, opening up new and interesting risk premium puzzles. "

Seems on this forum there is a relative negative bias against residential real estate vs. equities (understandably).
Interested to hear feedback/critcism on this from bogleheads with economics/finance backgrounds after reviewing the paper as I just don't have the background in economics/finance to critically review this paper.

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Re: Study: The Rate of Return on Everything, 1870-2015

Post by North Texas Cajun » Wed Aug 16, 2017 7:21 am

The authors express surprise that equity returns and real estate returns are similar despite equity returns being more volatile.

If I read this correctly, the study used 7.7% as the transaction cost for real estate. The authors used an OECD estimate. I don't know the U.S. compares with the rest of the world. I think 7.7% is much too low for U.S. residential real estate. I think sales commisions alone are today generally 6 to 7 percent. That's not the only costs a seller will incur. The buyer of residential real estate must also pay significant transaction costs, including inspection fees, closing costs, and moving expenses.

If the researchers grossly underestimated buyer and seller transaction costs, then they have overstated real estate returns.

The authors claim that equities are more risky than real estate. Did they correctly assess the relative volatility of the two assets? If they used short term volatility of equity returns but long term volatility of real estate returns, is that really valid.

I also think the illiquidity of real estate investment would cause investors to demand a higher return than otherwise. Certainly equities are much more liquid, and that should bring equity returns down relative to real estate returns. Some of that illiquidity expense is captured in the real estate commissions. But real estate sellers often incur duplicate utilities, duplicate insurance, and other extra expenses while waiting for a home to sell.

I'm not so sure about the author's overall assessment of equities vs real estate returns and risks.

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Re: Study: The Rate of Return on Everything, 1870-2015

Post by Top99% » Wed Aug 16, 2017 7:29 am

Thanks for posting another thought and discussion provoking set of charts Simplegift. I always learn something from the charts and the ensuing discussions. While I won't be buying a bunch of rental properties any time soon it does make me wonder if residential REITs (basically apartment REITs) might capture at least some of the residential real estate premium.
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Re: Study: The Rate of Return on Everything, 1870-2015

Post by AlohaJoe » Wed Aug 16, 2017 7:40 am

North Texas Cajun wrote:
Wed Aug 16, 2017 7:21 am
I think sales commisions alone are today generally 6 to 7 percent
Sales commissions in 2015 were 5.26%.

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Re: Study: The Rate of Return on Everything, 1870-2015

Post by jbolden1517 » Wed Aug 16, 2017 7:41 am

North Texas Cajun wrote:
Wed Aug 16, 2017 7:21 am
If I read this correctly, the study used 7.7% as the transaction cost for real estate. The authors used an OECD estimate. I don't know the U.S. compares with the rest of the world. I think 7.7% is much too low for U.S. residential real estate. I think sales commisions alone are today generally 6 to 7 percent. That's not the only costs a seller will incur. The buyer of residential real estate must also pay significant transaction costs, including inspection fees, closing costs, and moving expenses. If the researchers grossly underestimated buyer and seller transaction costs, then they have overstated real estate returns.
As someone selling a house, agreed. I'd be thrilled to just pay a 10% bid-ask spread and walk. I think the natural bid-ask spread is probably closer to 25% and so patient sellers and buyers end up doing a lot of work to narrow it and not pay the full spread. That being said though a 12.5% penalty over 20 years is only 59 basis points and over 40 years 29 basis points. Transactional friction doesn't do that much to long term assets.

North Texas Cajun
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Re: Study: The Rate of Return on Everything, 1870-2015

Post by North Texas Cajun » Wed Aug 16, 2017 8:09 am

jbolden1517 wrote:
Wed Aug 16, 2017 7:41 am
North Texas Cajun wrote:
Wed Aug 16, 2017 7:21 am
If I read this correctly, the study used 7.7% as the transaction cost for real estate. The authors used an OECD estimate. I don't know the U.S. compares with the rest of the world. I think 7.7% is much too low for U.S. residential real estate. I think sales commisions alone are today generally 6 to 7 percent. That's not the only costs a seller will incur. The buyer of residential real estate must also pay significant transaction costs, including inspection fees, closing costs, and moving expenses. If the researchers grossly underestimated buyer and seller transaction costs, then they have overstated real estate returns.
As someone selling a house, agreed. I'd be thrilled to just pay a 10% bid-ask spread and walk. I think the natural bid-ask spread is probably closer to 25% and so patient sellers and buyers end up doing a lot of work to narrow it and not pay the full spread. That being said though a 12.5% penalty over 20 years is only 59 basis points and over 40 years 29 basis points. Transactional friction doesn't do that much to long term assets.
The data I've seen shows that the median home buyer today stays in his home 9 years. Prior to 2008, the median period was only 6 years. I think transaction costs have been a significant factor in determining returns.

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Re: Study: The Rate of Return on Everything, 1870-2015

Post by selters » Wed Aug 16, 2017 8:30 am

How do they actually measure the rate of return on real estate? Do they just find data from the areas where people live or want to live today? If so, then the results are probably massively skewed by survivorship bias. I'm sure the annualized return of real estate in Dubai or Shanghai has been 30% for the last 50 years. But how were people to know that exactly this or that particular piece of desert or swamp was to become a big city in a few decades time?

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Re: Study: The Rate of Return on Everything, 1870-2015

Post by knpstr » Wed Aug 16, 2017 8:42 am

It is not a coincidence so many fortunes were/are made in real estate.

It is a fair point, that if the returns are "similar" owning index funds sure is virtually no work as compared to the work involved with managing a property (which tends to be overestimated by those not in real estate). Of course the commonplace use of leverage in RE (as opposed to stocks) even further advances one's returns. Also, the doom and gloom outlook on stocks of 4% returns going forward (which I do not subscribe to) makes a case for considering other places to put your money.

If all returns were equal, I'd invest money only in the stock market; but I do have some properties that I think were a better bang for my investing buck.

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Re: Study: The Rate of Return on Everything, 1870-2015

Post by AlohaJoe » Wed Aug 16, 2017 8:48 am

selters wrote:
Wed Aug 16, 2017 8:30 am
How do they actually measure the rate of return on real estate?
You could read the study and find out.

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Re: Study: The Rate of Return on Everything, 1870-2015

Post by KyleAAA » Wed Aug 16, 2017 8:56 am

That residential real estate beat stocks is intuitive to me. It's not a coincidence so many people have gotten rich off real estate.

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Re: Study: The Rate of Return on Everything, 1870-2015

Post by Watty » Wed Aug 16, 2017 9:03 am

Simplegift wrote:
Wed Aug 16, 2017 1:05 am
What’s unique about this new paper is that the researchers have assembled total return data on housing (as an investment, including rental income and capital appreciation) for 16 advanced countries over a nearly 150-year period.
I have not read the paper but one thing to remember is that in 1870 the US was more of an agrarian second world country than an advanced industrial country.

The US had just also been decimated by a brutal civil war.

At least for the US using 1870 as a starting point would have problems since it would include;

1) The post civil war recovery
2) The industrial reveloution
3) The transformation of the US from a second world country to a superpower.

They may have addressed these issues in the paper but you would need to be cautious about expecting the future returns to be similar.

You would also need to look at the details of how they measured the housing gains. Very few houses that existed in 1870 ares still around today. Even a 50 year old house that was built in 1967 is likely past its prime.

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Re: Study: The Rate of Return on Everything, 1870-2015

Post by azanon » Wed Aug 16, 2017 9:09 am

I would certainly hope one would make more from residential income from renting and being a landlord, which is an occupation, vs. merely passive investments in stocks or bonds. I didn't click on the actual study, but I hope that not too much time and effort was spent on the apples vs. oranges comparison!

Now if someone wants to compare, say a REIT fund, vs stocks and bonds, ok then now we're talking more apples vs. apples.

I've seen so many variations of this, and it's frustrating every time I hear it. Joe or Sue claims to be making more from their rentals than their stocks, and it never dawns on Joe or Sue all of the pain heartache, and time it takes to maintain all of that, and that logic would dictate that there will be a premium payment for their time and effort.
Last edited by azanon on Wed Aug 16, 2017 9:14 am, edited 1 time in total.

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Re: Study: The Rate of Return on Everything, 1870-2015

Post by staythecourse » Wed Aug 16, 2017 9:13 am

Simplegift, again thanks for a platform to start a great discussion.

Have not read the paper, but some initial thoughts/ question about the rental real estate over stocks. For example,
1. Will have to read the paper, but what is the methodology of the real estate component, i.e. is the interest for the loans taken into account, is the maintenance of the property taken into account, is the property taxes taken into account, is the appreciation of land taken into account, etc...
2. is there an illiquidity premium that has not been explored for rental real estate.
3. knowing returns WITHOUT discussing risk is like watching a movie without sound so what is the risk story, i.e. higher return for higher risk or higher return for less risk. The former makes sense the latter sounds like a free lunch or an nonquantifiable risk factor.
4. is the rental real estate have large right fat tail where there are few who make a TON and that throws off the average returns?
5. Since most rental real estate is presumably done as a leverage asset class maybe we should compare like to like and compare rental real estate to LEVERAGE stocks. That may be a better apples to apples comparison.

These are just some of the questions I would start with.

Look forward to reviewing the methodology of the study.

Good luck.
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Re: Study: The Rate of Return on Everything, 1870-2015

Post by Valuethinker » Wed Aug 16, 2017 11:35 am

selters wrote:
Wed Aug 16, 2017 8:30 am
How do they actually measure the rate of return on real estate? Do they just find data from the areas where people live or want to live today? If so, then the results are probably massively skewed by survivorship bias. I'm sure the annualized return of real estate in Dubai or Shanghai has been 30% for the last 50 years. But how were people to know that exactly this or that particular piece of desert or swamp was to become a big city in a few decades time?
I imagine you couldn't buy a property in Shanghai 30 years ago? That's 1987-- for sure you could not buy one as a foreigner.

Maybe if you were a Hong Kong national you could have bought in Shenzen 30 years ago.

Dubai? Well I shall predict that in 30 years property in Dubai will be much cheaper than it is now (fortunately I won't be around to make good on that call if I am wrong ;-)).

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Re: Study: The Rate of Return on Everything, 1870-2015

Post by Valuethinker » Wed Aug 16, 2017 11:39 am

Residential Real Estate is also a consumption good. Your home provides you housing services.

For that reason alone, you'd expect the returns on RRE to be significantly lower than stocks (you can't live in your stock portfolio, ask the fellows in Trading Places ;-)). If it is similar to stocks then RRE really has been an amazing investment.

I need to see if authors have adjusted for that?

Have they adjusted for capital investment into housing? Repair & maintenance? Property taxes? A stock portfolio costs you nothing to manage. Houses eat money. Houses that are out of date are worth significantly less- -conservative estimate 1% depreciation p.a.

And what about the split between land and houses? Evidence I have seen for commercial use land in US cities estimates something like a 0.5-1.0% p.a. fall in value of city centers relative to outskirts for the past 50 years: the impact of the sprawl of American cities, richer populations (more cars) and changing patterns of work & shopping. Centrality of location (near the train station) has just become less important.

Will try to have a look at to see if these questions are answered.

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Re: Study: The Rate of Return on Everything, 1870-2015

Post by Valuethinker » Wed Aug 16, 2017 11:45 am

We should note demographics.

Since 1870 the developed world, and underdeveloped, has seen a revolution in life expectancies.

As a result, even though fertility rates follow a predictable pattern 20-30 years post life extension (faster in China), populations worldwide have soared. About 4-5x in that time frame? And in developed countries too.

So the world got a *lot* richer in the past 150 years, and there are a lot more of us.

Turn to the future. We know that populations in the developed countries will not grow as fast, and, in fact, will begin to fall. There is of course the possibility of mass migration, but that's not likely, and even on record scale it won't change that.

If we look at Germany since 1992 and Japan since 1990, both with very mature demographics, housing prices have fallen, generally. Similarly Italy and Spain are now demographically in that position (worse). Russia is not far behind and neither are most other western countries, all of Eastern Europe etc.

By 2050 we are all looking at a baby bust.

We don't need to go international on this. In the USA, there are plenty of places in the Midwest with falling populations, rapidly aging. Hispanic immigration sometimes gave a demographic fillup (e.g. the meat packing industry) but that's likely over.

It's not credible that western nations, let alone Japan, accept the levels of immigration that would reverse those trends. Even the USA or Canada or Australia.

Meanwhile, technology (Virtual Reality, universal broadband) and if they happen, self-driving cars, make possible living even further apart-- commute is not such a constraint if the car does it for you while you work or read, or if you don't have to go into the office more than a couple of days a month. Thus reducing the pricing advantage to homes closer to work.

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Re: Study: The Rate of Return on Everything, 1870-2015

Post by SimpleGift » Wed Aug 16, 2017 12:09 pm

Valuethinker wrote:
Wed Aug 16, 2017 11:45 am
We should note demographics.

Since 1870 the developed world, and underdeveloped, has seen a revolution in life expectancies.

As a result, even though fertility rates follow a predictable pattern 20-30 years post life extension (faster in China), populations worldwide have soared. About 4-5x in that time frame? And in developed countries too.

So the world got a *lot* richer in the past 150 years, and there are a lot more of us.
This may help explain why the OP study showed much higher long-term, real rates of price appreciation in residential real estate than previous research. Two well-known studies of long-run real estate prices were one in Amsterdam from 1628-1973, and one in Beijing from 1644 to 1840. Both showed very small real gains in long-term price appreciation, on the order of 0.5% to 1.0% per year (note that neither of these studies considered net rental income returns).

The OP study found real rates of price appreciation on housing of about 3.3% per year. Why so much higher than previous research? One possibility was increased household borrowing, especially in the second half of the 20th century, which would increase returns. However, the OP study explicitly states that the housing returns are limited to un-leveraged real estate:
Jorda et. al. wrote:The benchmark rent-price ratios from the IPD used to construct estimates of the return to housing, refer to rent-price ratios of unleveraged real estate. Consequently, the estimates presented so far constitute only un-levered housing returns of a hypothetical long-only investor, which is symmetric to the way we (and the literature) have treated equities.
This discrepancy in returns puzzled my thoughts last night. But it’s quite possible, as Valuethinker suggests, that more wealth and more people worldwide since 1870 might be the explanation for the increased rate of real housing price appreciation (3.3% per year), in comparison to earlier time periods (0.5%-1.0% per year). Maybe I'll sleep better tonight.
Cordially, Todd

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Re: Study: The Rate of Return on Everything, 1870-2015

Post by bigred77 » Wed Aug 16, 2017 12:38 pm

I perused the paper and specifically focused on their methodology used in real estate returns. To be honest I couldn't quite wrap my head around it. I question the validity of their findings, but it's probably not fair to criticize if I can't even understand how they constructed their data set.

My main concern is that they are saying for over the last 150 years or so, real estate has had less risk and a higher return than equities. That violates a commonly accepted tenant that in efficient markets, higher risk assets have higher returns. So either real estate has been a significantly inefficient market for hundreds of years or their number might be off. Considering the difficulty of obtaining global real estate price levels, rent to price ratios, maintenance costs, transaction costs, etc back into the 1800s, I think it's far more likely that their numbers are off. That's my takeaway but I need to better understand their methodology.

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Re: Study: The Rate of Return on Everything, 1870-2015

Post by Admiral » Wed Aug 16, 2017 12:44 pm

The r.e. piece is perhaps not surprising globally, over the long term, based on population growth and the move from less-developed/agrarian to industrial/post-industrial economies worldwide. More people demand more housing, more housing means less develop-able land, higher wages mean rising costs, and so on.

However, if Shiller is to be believed, this does not appear to be the case in the U.S., where prices have basically matched inflation since 1890.

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Re: Study: The Rate of Return on Everything, 1870-2015

Post by clutchied » Wed Aug 16, 2017 12:46 pm

Watty wrote:
Wed Aug 16, 2017 9:03 am
Simplegift wrote:
Wed Aug 16, 2017 1:05 am


You would also need to look at the details of how they measured the housing gains. Very few houses that existed in 1870 ares still around today. Even a 50 year old house that was built in 1967 is likely past its prime.

not to belabor your point but I own a place that is pre-civil war, 1842. I love it dearly.

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Re: Study: The Rate of Return on Everything, 1870-2015

Post by LeSpy » Wed Aug 16, 2017 1:20 pm

I find the study interesting so I look forward to reading it in more detail.

However, I must admit that looking at the graphs, when I try to look to correlate the cycles in the returns with historical trends (e.g., Keynesian v Neoliberal or Gilded Age) it seems to be mostly noise.

If you had given me these graphs without any labels and asked me to describe the nature of the data I simply would've said it follows along a mean with some occasional disruptions followed by a snap-back.

The only clear correlation to major events are the two world wars and the global depression.

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Re: Study: The Rate of Return on Everything, 1870-2015

Post by warner25 » Wed Aug 16, 2017 2:29 pm

AlohaJoe wrote:
Wed Aug 16, 2017 1:48 am
I sometimes wonder if the "housing bubble" might not be a bubble after all but simply the bidding up of an asset to drive down its future expected returns to bring It in line with other assets. That is, perhaps housing was underpriced for the past ~130 years and now it is "correctly" priced (or at least "more correctly priced").
This is a really interesting thought. I'm familiar with the Shiller home price index, and I've always accepted it as gospel that housing tracks inflation (really, I've done so with pride and likely some bias, since I've always been a renter and I think most home owners would be shocked by the Shiller chart). During the housing bubble, people who knew nothing simply rationalized it with "housing prices always go up, of course, because they ain't making any more land." But that was laughable because the Shiller chart so clearly contradicted the premise. Now I'm looking at it a different way... just like stock prices have been historically "high" for two decades, but that's potentially explained by proliferation of the 401k and publications touting the large equity risk premium that existed at least until the 1990s. I'm certainly open to explanations for why home prices are already approaching the mid-2000s peak again... http://www.multpl.com/case-shiller-home ... -adjusted/

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Re: Study: The Rate of Return on Everything, 1870-2015

Post by whodidntante » Wed Aug 16, 2017 2:51 pm

Residential real estate investing is a job. I've already got one. Also it has costs and risks that if excluded will cause you to overestimate the returns and underestimate the risks of the investment. Taxes, loan costs and leverage risks, maintenance costs, insurance, legal costs (eviction, torts, etc.), transaction costs, vacancies, and black swans. I'm not saying it's a "bad investment" but you cannot compare it to lazily buying an index fund.

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Re: Study: The Rate of Return on Everything, 1870-2015

Post by jalbert » Wed Aug 16, 2017 3:00 pm

It is very interesting, but some caveats. The authors state:
This method assumes that the indices cover a representative portfolio of houses. If so, there is no need to correct for changes in the housing stock, and only information about the growth rates in prices and rents are necessary
On average, Americans live in larger houses today than in 1870. Corrected for inflation, construction cost of housing is lower today than in 1870. Measuring changes in rents or prices of a representative sample of houses does not capture return properly. Maintenance cost is also variable over time and must be incorporated.

Similarly, most bonds have a maturity of 30 years or less. Bond returns over 140 years is thus the return on a trading strategy even if just replacing maturing bonds with new ones.
Index fund investor since 1987.

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Re: Study: The Rate of Return on Everything, 1870-2015

Post by SimpleGift » Wed Aug 16, 2017 3:06 pm

bigred77 wrote:
Wed Aug 16, 2017 12:38 pm
My main concern is that they are saying for over the last 150 years or so, real estate has had less risk and a higher return than equities. That violates a commonly accepted tenant that in efficient markets, higher risk assets have higher returns. So either real estate has been a significantly inefficient market for hundreds of years or their number might be off.
Yes, the long-term risk/return for residential real estate in this study seems abnormal. From the data tables in the paper, one can calculate the Sharpe ratios for bonds, equities and housing (i.e., the ratio between average annual returns above the risk-free rate and the annual standard deviation of those returns). These are Sharpe ratios I get for the full 1870-2015 period:
  • Bonds…….…...….0.19
    Stocks………...…..0.27
    Housing…………..0.71
It’s hard to explain why housing has had such greater risk-adjusted returns than stocks. Perhaps a large liquidity premium, since it’s so much harder to construct and maintain a diversified portfolio of residential real estate than a broad-market basket of equities?

Since this seems to be the most anomalous finding in the study, I expect it will be the subject of further research.
Last edited by SimpleGift on Wed Aug 16, 2017 3:08 pm, edited 1 time in total.
Cordially, Todd

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Re: Study: The Rate of Return on Everything, 1870-2015

Post by willthrill81 » Wed Aug 16, 2017 3:07 pm

azanon wrote:
Wed Aug 16, 2017 9:09 am
I would certainly hope one would make more from residential income from renting and being a landlord, which is an occupation, vs. merely passive investments in stocks or bonds. I didn't click on the actual study, but I hope that not too much time and effort was spent on the apples vs. oranges comparison!
Those are my thoughts as well. It's like comparing running your own business to just buying shares of publicly traded companies.

Another issue with the comparison is the inability of most retail investors to adequately diversify their rental income. 20-30 rental properties is quite a lot for most of us, but from a diversification standpoint, it's not much. By comparison, one can buy stake in thousands of companies very easily for only 3-4 basis points.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Study: The Rate of Return on Everything, 1870-2015

Post by SimpleGift » Wed Aug 16, 2017 4:36 pm

If interested in more about this research, covering 17 advanced countries from 1870-2015, one can access for free some of the original data sets in Excel format (including housing prices, stock prices, interest rates, inflation rates, real GDP growth and more) — plus read similar papers that have been published in recent years based on these data sets:
For the many do-it-youself quant types here on the Bogleheads Forum, this is the first time that I’ve seen such a rich global data set available for free. Even the well-known Dimson, Marsh and Staunton global return series, covering stock and bond returns for various countries since 1900, is only available through commercial outlets and the Credit Suisse annual summaries. So these free data sets could be a wonderful resource to explore, if interested.
Cordially, Todd

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Re: Study: The Rate of Return on Everything, 1870-2015

Post by garlandwhizzer » Wed Aug 16, 2017 7:18 pm

Very interesting paper, Simplegift, thanks for posting. It evaluates global, rather than US-only data. It includes Europe, Japan, and Australia, basically DMs.

I wonder how this squares with Shiller's charts of US house prices adjusted for inflation and for maintenance costs.Shiller asserts that real home prices, adjusted thusly, produce minimal real returns since 1870. Part of this discrepancy may be US versus other DM results. Devastation both physical and financial from World Wars hit Europe very hard twice in the 20th century and hit Japan very hard once (WW2). I don't know what effect, if any, this might have had on the real estate versus equity picture, but it is interesting that England which suffered significant but less war damage, and the US which suffered much less, essentially no physical devastation/destruction, are outliers to the pervasive theme of real estate's relative outperformance. The chart on page 20 of the paper demonstrates this. US equities outperformed US real estate for the entire period, as well as post 1950 and post 1980, a consistent finding also in England. It may or may not have something to do with WW1 and WW2. Periodic major wars have been devastating Europe for centuries, one reason Europeans are fed up with war in general. It may also have something to do with the Anglo-macro-economic model (less state interference with free enterprise, less socialism) as opposed to the continental European/Japanese model where socialism is the dominant theme.

What I find interesting and reassuring is that, for investing purposes, if you invest in quality assets, be it broadly-based exposure to equity or broadly based exposure to real estate, and you hold onto it for the really long term, you'll do just fine regardless of 2 world wars, many smaller wars, the Great Depression, multiple recessions, several hyper-inflation episodes, and endless political upheavals. It seems that markets, both equity and real estate, are determined in spite of everything to go up in the really long term.

Garland Whizzer

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Re: Study: The Rate of Return on Everything, 1870-2015

Post by Nate79 » Wed Aug 16, 2017 8:27 pm

Wow, absolutely amazing paper from some very well esteemed authors. It seems meticulously researched and put together. The tables of data breaking down the return for equities and real estate by capital gain vs income by country was very interesting.

I would suggest people actually read the paper.

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Re: Study: The Rate of Return on Everything, 1870-2015

Post by AlohaJoe » Wed Aug 16, 2017 8:37 pm

willthrill81 wrote:
Wed Aug 16, 2017 3:07 pm
By comparison, one can buy stake in thousands of companies very easily for only 3-4 basis points.
This has only been true in the US for about 20-30 years out of the 145 years the authors look at. It still isn't true globally, which is what the authors were looking at.

In 1950 you couldn't diversify stocks easily & cheaply. Sure it was easier & cheaper than houses but then we get back to holding periods affecting round trip costs.

The authors have an entire section on whether you can compare real estate & stock returns and it is hard not to feel like most people didn't read their paper.

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Re: Study: The Rate of Return on Everything, 1870-2015

Post by siamond » Wed Aug 16, 2017 9:16 pm

Simplegift wrote:
Wed Aug 16, 2017 4:36 pm
If interested in more about this research, covering 17 advanced countries from 1870-2015, one can access for free some of the original data sets in Excel format (including housing prices, stock prices, interest rates, inflation rates, real GDP growth and more) — plus read similar papers that have been published in recent years based on these data sets:
For the many do-it-youself quant types here on the Bogleheads Forum, this is the first time that I’ve seen such a rich global data set available for free. Even the well-known Dimson, Marsh and Staunton global return series, covering stock and bond returns for various countries since 1900, is only available through commercial outlets and the Credit Suisse annual summaries. So these free data sets could be a wonderful resource to explore, if interested.
That will undoubtedly give me some enjoyable "me time in company of Ms Excel" this winter (plus some grumblings from my wife, ah, the jealousy!)... Thanks for sharing! :wink:

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Re: Study: The Rate of Return on Everything, 1870-2015

Post by SimpleGift » Wed Aug 16, 2017 9:36 pm

siamond wrote:
Wed Aug 16, 2017 9:16 pm
That will undoubtedly give me some enjoyable "me time in company of Ms Excel" this winter...
Glad you saw the post, siamond, as I was going to send you a PM otherwise. I'm looking forward to working with the data sets myself. The authors were certainly very generous to make them publicly available for free.
Cordially, Todd

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Re: Study: The Rate of Return on Everything, 1870-2015

Post by willthrill81 » Wed Aug 16, 2017 9:37 pm

AlohaJoe wrote:
Wed Aug 16, 2017 8:37 pm
willthrill81 wrote:
Wed Aug 16, 2017 3:07 pm
By comparison, one can buy stake in thousands of companies very easily for only 3-4 basis points.
This has only been true in the US for about 20-30 years out of the 145 years the authors look at. It still isn't true globally, which is what the authors were looking at.

In 1950 you couldn't diversify stocks easily & cheaply. Sure it was easier & cheaper than houses but then we get back to holding periods affecting round trip costs.
That's very true, but we're not talking about investing in 1950 are we? I for one am interested in how we can make use of this information in the here and now.

Aside from REITs, I see no way that the average retail investor can gain nearly as much diversification with rental real estate as with stocks.
AlohaJoe wrote:
Wed Aug 16, 2017 8:37 pm
The authors have an entire section on whether you can compare real estate & stock returns and it is hard not to feel like most people didn't read their paper.
I'm not particularly interested in reading the whole paper.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Study: The Rate of Return on Everything, 1870-2015

Post by SimpleGift » Wed Aug 16, 2017 11:41 pm

Admiral wrote:
Wed Aug 16, 2017 12:44 pm
The r.e. piece is perhaps not surprising globally, over the long term, based on population growth and the move from less-developed/agrarian to industrial/post-industrial economies worldwide. More people demand more housing, more housing means less develop-able land...
You're probably right. The OP research team actually published another paper in 2014 (which I just found tonight), explaining the global price appreciation of residential housing in the 14 advanced countries since 1870. A summary article can be found here, and the full paper here. Their conclusion? Sharply rising land prices in the last half of the 20th century explains most all of the real price appreciation in global residential real estate over the past 150 years (chart below).
The study indicates that up to 80% of the increase in house prices from 1950 to 2012 can be attributed to land appreciation alone. Factors contributing to the increased demand for land include increased transportation costs, more zoning regulations, greater expenditures on housing in consumer budgets, easier borrowing conditions and the like.
Cordially, Todd

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Re: Study: The Rate of Return on Everything, 1870-2015

Post by CyclingDuo » Thu Aug 17, 2017 12:26 am

Simplegift wrote:
Wed Aug 16, 2017 11:41 pm
The study indicates that up to 80% of the increase in house prices from 1950 to 2012 can be attributed to land appreciation alone. Factors contributing to the increased demand for land include increased transportation costs, more zoning regulations, greater expenditures on housing in consumer budgets, easier borrowing conditions and the like.
80%?

There you go. We all should have invested in land...
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Re: Study: The Rate of Return on Everything, 1870-2015

Post by triceratop » Thu Aug 17, 2017 2:28 am

There hasn't been much discussion of taxes, which is surprising to me. The authors themselves note:
Next, when calculating equity and housing returns, we do not account for taxes. From an
investor’s perspective accounting for taxes is clearly important. Equity capital gains and, for some
countries and periods, dividend income, are typically subject to a capital gains tax. When dividends
are not taxed as capital gains, they are typically taxed as income. In some countries, housing
capital gains are subject to capital gains taxes, but particularly owner-occupied houses have been
granted exemptions in many cases. Additionally, housing tends to be subject to further asset-specific
levies in the form of property taxes, documented extensively in Appendix K. For both equities
and housing, the level and applicability of taxes has varied over time. For housing, this variation
in treatment also extends to the assessment rules, valuations, and tax band specifications. As a
ballpark estimate, the impact of property taxes would lower the real estate returns by less than
one percentage point per year relative to equity (see Appendix K for further detail). The various
exemptions for homeowners make the impact of capital gains taxes on real estate returns even
harder to quantify but also imply that differential tax treatment is unlikely to play an important role
in explaining the return differentials between equities and housing. Since quantifying the time- and
country-varying effect of taxes on returns with precision is beyond the scope of this study, we focus
on pre-tax returns throughout the paper.
They bury country-specific taxation in Appendix K as beyond the scope of their work, especially as due to compounding issues with changes-in-legislation. However I think it's premature to make conclusions from this data, with that caveat. Consider: if one is pricing real estate for after-tax returns surely there should be some pre-tax premium demanded over assets with the same risk profile for the extra tax hit (at least, for some investors, so to the extent these investors marginally make decisions -- if that makes sense), reducing post-tax returns.

Consider current U.S. taxes (currently -- obviously this varied over time):
  • On traditional stock investments: (1) income tax rate on non-qualified portion (with care this can be 0%) of dividends (2) qualified dividend rate, max of 23.8% (for most individual investors 15%) on most income (2) long-term capital gains rate on capital appreciation.
  • On real estate: (1) ordinary income tax rate on all rental income (2) long-term capital gains rate on appreciation.
Looking at this ex ante I would definitely expect higher pre-tax returns for real estate than for stocks. This is especially true because I expect the wealthier individuals disproportionately own real estate as investments versus a higher proportion of lower-income people who may rent (and may have tax-sheltered investments, possibly through a pension). I also note that the capital gain portion of total return was slightly higher for equity (52%) as compared to housing (45%).

The authors are quite right that for homeowners there are various exemptions carved out, but they're not everyone. It's also true that property tax rates may affect housing returns by less than a percentage point, but what about the differential tax treatment of income? The geometric rental income return was 6.41%. At present rates that is 2.53% of return lost to tax.

Hard to determine exactly what the net effect on pre-tax CAGR this should amount to, but I am suspicious of making the easy conclusion from the top-line results of this data.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: Study: The Rate of Return on Everything, 1870-2015

Post by triceratop » Thu Aug 17, 2017 2:29 am

msk wrote:
Wed Aug 16, 2017 1:28 am
For those interested in loooong term returns I would heartily recommend the tome "Capital in the 21st Century" by Thomas Piketty, possibly one of the greatest new references for economists. His findings: Productive Real Estate paid 5% real terms p.a. while Trade & Industry paid a percent to two higher, over a period of >300 years. He does not say much about bonds because they are basically a product of fiat currencies that did not exist a 100+ years ago. Inflation was next to nil for centuries (before the invention of fiat currencies). I am still uneasy with equating stock market returns in recent decades with "Trade & Industry" because of various frictional factors (like corporation tax) but when I checked the numbers for 1966 to 2016 I found that the SP500 compounded @6.6%, with a 3.1% dividend yield and inflation compounded at 4% p.a (i.e. approximately 5.7% real terms). Seems that Piketty's findings of >5% real for Trade & Industry (=stocks less friction?!) did continue through those recent 50 years too. Currently inflation is lower, so we would expect that trends react automatically...
You may be interested to read the section on how the current paper's findings confirm Piketty re: r > g.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: Study: The Rate of Return on Everything, 1870-2015

Post by grok87 » Thu Aug 17, 2017 5:20 am

Simplegift wrote:
Wed Aug 16, 2017 4:36 pm
If interested in more about this research, covering 17 advanced countries from 1870-2015, one can access for free some of the original data sets in Excel format (including housing prices, stock prices, interest rates, inflation rates, real GDP growth and more) — plus read similar papers that have been published in recent years based on these data sets:
For the many do-it-youself quant types here on the Bogleheads Forum, this is the first time that I’ve seen such a rich global data set available for free. Even the well-known Dimson, Marsh and Staunton global return series, covering stock and bond returns for various countries since 1900, is only available through commercial outlets and the Credit Suisse annual summaries. So these free data sets could be a wonderful resource to explore, if interested.
thanks. looks like a very useful data set.
Keep calm and Boglehead on. KCBO.

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Re: Study: The Rate of Return on Everything, 1870-2015

Post by Tyler9000 » Thu Aug 17, 2017 9:42 am

Simplegift wrote:
Wed Aug 16, 2017 4:36 pm
If interested in more about this research, covering 17 advanced countries from 1870-2015, one can access for free some of the original data sets in Excel format (including housing prices, stock prices, interest rates, inflation rates, real GDP growth and more) — plus read similar papers that have been published in recent years based on these data sets:
For the many do-it-youself quant types here on the Bogleheads Forum, this is the first time that I’ve seen such a rich global data set available for free. Even the well-known Dimson, Marsh and Staunton global return series, covering stock and bond returns for various countries since 1900, is only available through commercial outlets and the Credit Suisse annual summaries. So these free data sets could be a wonderful resource to explore, if interested.
This is spectacular. Thanks!

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Re: Study: The Rate of Return on Everything, 1870-2015

Post by SimpleGift » Thu Aug 17, 2017 11:59 am

^^^ Just a few quick, initial observations about the Jorda-Shularick-Taylor (JST) online data sets, 1870-2013:

Country Coverage
  • • 17 advanced countries: Australia, Belgium, Canada, Denmark, Finland, France, Germany, Italy, Japan, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, United Kingdom and the United States.

    • Not included are 6 countries in the Dimson-Marsh-Staunton database: Austria, China, Ireland, New Zealand, South Africa and Russia (1900-2016).
Time Coverage
  • • A few gaps around the world war years, but surprisingly complete data on each country going back to 1870.

    • The online data sets are current to 2013 — but several recent JST papers report data to 2015. So perhaps there’s hope the authors will update their online database with recent years’ data on a ongoing basis.
Data Sets Included
  • • Truly amazing, broad coverage, including stock prices, housing prices, short and long-term interest rates (nominal), consumer prices (1990=100), plus a whole raft of population, GDP, import and export, and other data sets back to 1870.

    • The stock and housing return series appear to be price only — but a few of the JST papers include dividend and rental income return data. So perhaps these data sets might be available from the authors, but just not published online?
Last edited by SimpleGift on Thu Aug 17, 2017 4:32 pm, edited 1 time in total.
Cordially, Todd

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Re: Study: The Rate of Return on Everything, 1870-2015

Post by jbolden1517 » Thu Aug 17, 2017 2:41 pm

North Texas Cajun wrote:
Wed Aug 16, 2017 8:09 am
The data I've seen shows that the median home buyer today stays in his home 9 years. Prior to 2008, the median period was only 6 years. I think transaction costs have been a significant factor in determining returns.
Wow! I know my in laws do that. Thought it was uncommon.

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Re: Study: The Rate of Return on Everything, 1870-2015

Post by Valuethinker » Thu Aug 17, 2017 4:27 pm

jalbert wrote:
Wed Aug 16, 2017 3:00 pm
It is very interesting, but some caveats. The authors state:
This method assumes that the indices cover a representative portfolio of houses. If so, there is no need to correct for changes in the housing stock, and only information about the growth rates in prices and rents are necessary
On average, Americans live in larger houses today than in 1870. Corrected for inflation, construction cost of housing is lower today than in 1870. Measuring changes in rents or prices of a representative sample of houses does not capture return properly. Maintenance cost is also variable over time and must be incorporated.

Similarly, most bonds have a maturity of 30 years or less. Bond returns over 140 years is thus the return on a trading strategy even if just replacing maturing bonds with new ones.
Here is the good news on fixed income.

UK government has issued long term perpetual bonds since around 1711, part of the South Sea Bubble bailout.
Called consols.

So we have 3 centuries of "pure" interest rates.

Alas we only have inflation linked bonds since 1980 but we can at least work out a real rate of return.

The 1846 War Loan paid 3.5 per cent from memory and was only finally retired couple of years ago.

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Re: Study: The Rate of Return on Everything, 1870-2015

Post by hoops777 » Thu Aug 17, 2017 6:25 pm

To be honest,what happened 100 years ago or even 50 years ago financially is not all that meaningful to the world we live in now,especially as any predictive tool.
K.I.S.S........so easy to say so difficult to do.

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Re: Study: The Rate of Return on Everything, 1870-2015

Post by Nate79 » Thu Aug 17, 2017 7:02 pm

hoops777 wrote:
Thu Aug 17, 2017 6:25 pm
To be honest,what happened 100 years ago or even 50 years ago financially is not all that meaningful to the world we live in now,especially as any predictive tool.
How do you know that?

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Re: Study: The Rate of Return on Everything, 1870-2015

Post by siamond » Thu Aug 17, 2017 7:19 pm

Simplegift wrote:
Thu Aug 17, 2017 11:59 am
The online data sets are current to 2013 — but several recent JST papers report data to 2015. So perhaps there’s hope the authors will update their online database with recent years’ data on a ongoing basis.
We can fill recent gaps by other means (e.g. MSCI for per-country equities; OECD for per-country interest rates). When I'll be back home (fishing trip!), I'll compare the 1970+ numbers from those two data sources with the JST data set. Unless somebody beats me to it! :wink:

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Re: Study: The Rate of Return on Everything, 1870-2015

Post by protagonist » Thu Aug 17, 2017 7:24 pm

Another person who has not read the paper, but....
1. Other things I have seen suggest that real estate has just barely kept up with inflation over the past 100-150 years, and that is including its meteoric rise in value over the past few decades. Here are a few articles I quickly found in a google search. I have seen others going back to about 1870 with essentially the same conclusion. I don't know who to believe, as I have not read the original papers or analyzed the data with a critical eye.
http://observationsandnotes.blogspot.co ... -1900.html
http://visualizingeconomics.com/blog/20 ... s1890-2010

2. My gut feeling (and that is really all it is), is that whatever you invest in, over a long enough period (centuries, millenia, ???), it is a zero-sum game. The past two centuries or so have been truly remarkable, following the industrial revolution. We have seen growth that may be unprecedented in the course of human civilization. Stocks have been outperforming other investments recently (past century or two is "recent" to me, since I have lived 65 years), probably simply because industrial growth has been astronomic. Such growth is unsustainable over a long enough period of time....carry 5% real annual growth out far enough and an owner of a few shares of Microsoft could eventually buy the entire universe. On the other hand, I would imagine that an investor in the "All-Empire Index Fund" in Rome in the latter days of Marcus Aurelius at the tail end of another boom century (around 200 AD) may have had to wait until the 19th century just to break even.

3. Despite perceptions, 1870 just wasn't very long ago. Less than two average lifetimes back to back, assuming people live on average about 80 years. Two people investing in the stock market who lived back-to-back, one born in 1870 and one born in 1950 or 1940, would have both done very well. As for those born today, I haven't a clue. I remember treating patients born in the 1870s when I was a medical student in the 1970s. I remember seeing a guy on TV when I was young who was in the Ford Theater the night Lincoln was shot. And I'm not very old. So really, we don't have a whole lot of data from which to draw conclusions, or at least any conclusions of relevance to a totally unknown future. In another 50 years humans could be living like George Jetson or like Fred Flintstone. How long our period of unprecedented growth will continue is anybody's guess.

BTW, I just found the clip of the Ford Theater guy on youtube: https://www.youtube.com/watch?v=1RPoymt3Jx4

And some may find this interesting. Growth of "real wages" in Stockholm since 1540. viewtopic.php?f=10&t=140688&hilit=stockholm#p2082136

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