A random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing

BASIC 
SERIES: 
SUMMARY
STATISTICS OF ANNUAL TOTAL
RETURNS FROM 1926 TO 2009
11.9

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Source: Ibbotson Associates.
A quick glance shows that over long periods of time,

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common stocks have, on average, provided relatively
generous total rates of return. These returns, including
dividends and capital gains, have exceeded by a substantial
margin the returns from long-term bonds, Treasury bills, and
the inflation rate as measured by the annual rate of increase in
consumer prices. Thus, stocks have tended to provide
positive “real” rates of return, that is, returns after washing
out the effects of inflation. The data show, however, that
common-stock returns are highly variable, as indicated by the
standard deviation and the range of annual returns, shown in
adjacent columns of the table. Returns from equities have
ranged from a gain of more than 50 percent (in 1933) to a loss
of almost the same magnitude (in 1931). Clearly, the extra
returns that have been available to investors from stocks have
come at the expense of assuming considerably higher risk.
Note that small-company stocks have provided an even
higher rate of return since 1926, but the dispersion (standard
deviation) of those returns has been even larger than for
equities in general. Again, we see that higher returns have
been associated with higher risks.
There have been several periods of five years or longer
when common stocks have produced negative rates of return.

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The early 1930s were extremely poor for stock-market
investors. The early 1970s also produced negative returns.
The one-third decline in the broad stock-market averages
during October 1987 is the most dramatic change in stock
prices during a brief period since the 1930s. And stock
investors know only too well how poorly stocks performed
during the first decade of the 2000s. Still, over the long haul,
investors have been rewarded with higher returns for taking
on more risk. However, there are ways in which investors can
reduce risk. This brings us to the subject of modern portfolio
theory, which has revolutionized the investment thinking of
professionals.