David Bianco, chief US stock strategist at Bank of America Merrill Lynch, suggests that the investors made far less in the past 50 years than the S&P 500 suggests. As quoted in Bloomberg:
While the S&P 500 returned an average of 9.5 percent annually for the 50-year period, the comparable figure after all the adjustments [ed. trading and management costs, dividend and capital-gain taxes, and inflation] was a mere 1.3 percent, according to Bianco’s calculations. Both averages are geometric, a multiplication- based method often used to calculate average returns.
So, what should we make of all of these surprisingly meager returns?
Well, Bianco himself says that this signals that now would be a good time to buy US stocks and that stocks, given that inflation and trading costs are low on a historical basis, justify a higher premium to the market. He thinks the market has about 11% higher to run.
- The Curious Capitalist believes that this proves we need an entire overhaul in how we think about and save for retirement in the U.S.
- The Audit doesn’t like the smell of these numbers and criticized Bloomberg for not including the assumptions used in computing the meager returns.
- The Globe and Mail does an OK job dissecting what Bianco is actually saying (while not saying too much).
Whether Bianco’s numbers are right, what’s interesting to me — and for readers of this blog — is the potential connection between decrease in trading costs and future returns. Low commissions, tons of free content online, crowdsourcing, screening, piggyback investing, and trade mirroring are part of this process.
Disclosure: No positions