These days the consensus view, looking out over the next few decades, seems to be we should expect more modest returns from stocks than we’ve enjoyed over the past few.
They see factors forming that look to act as a drag on what we might otherwise historically expect.
Indeed this is the opinion of my personal hero Vanguard founder and creator of index funds, Jack Bogle.
As for me, I confess to having no idea, let alone the Time Machine tantalizingly mentioned in the title. But we can do a little thought experiment together.
Let’s suppose we are all gathered together over beers or coffee way back in 1975. I pick this year as it was the year in which I first started to invest and the year Mr. Bogle launched the first index fund. Plus it is a span of a full 40 years.
Suppose that someone, let’s say you, pipes up and says something like “I just read an article about this guy Bogle and it seems he just created this thing called an index fund. The idea is that it will buy and hold every stock in the S&P 500 index and just track it with no effort to outperform. Wonder how that’s gonna work out over the next 40 years?”
Well, I might say, as it happens I just returned from 2015 in my new Time Machine. While I was there, I looked up the history of those 40 years and here’s what happened:
As you all know, Nixon took us off the Gold Standard and inflation has been increasing. Turns out, that got much worse. Plus it combined with a stagnate economy and lead to someone coining a new term: Stagflation. Very Ugly.
So ugly the stock market languished badly enough that by 1979 no less than Business Week declared:
By the early 1980s mortgage rates were over 15%.
But then, around 1982, the Stock Market turned up and began a rather amazing bull run. At least until the fall of 1987 and Black Monday…
…the single largest percentage plunge in market history. Including the Great Depression.
This ushered in a rather nasty recession that lasted well into the 1990s.
But at the same time some rather remarkable developments began to unfold that in the mid to late ’90s came to be known as The Tech Boom or…
But as you can see, that ended in tears. Terrible tears.
But not as terrible as the tears that were just around the corner with the worst attack on US soil since Pearl Harbor:
The Twin Towers, September 11, 2001
In turn, this led the US to get embroiled in two very expensive (in both money and blood) wars — Afghanistan and Iraq — that were still going on when I climbed back into my Time Machine in 2015.
Between the tech crash, 9/11 and the ensuing wars, the economy took a major hit. In response, interest rates were brought down even further and credit was made ever more available.
It would take a book or 12 to tell you the story of what the financial industry did with this. 
Suffice to say, it resulted in an incredible run up in housing prices and an even more breathtaking housing collapse.
Which lead to the worst stock market crash since the Great Depression…
Before the dust settled in 2009, the market had plunged over 50% and it looked like the bottom would never come.
But it did and as I climbed back into the Time Machine in 2015 the market was again going up.
“Wow,” you might say, “that is gonna be one ugly 40 year run.”
Yes, indeed it was.
“I guess that new S&P 500 Index fund didn’t work out all that well then. Better stay away from it.”
Actually, 1975 thru 2015, it had an average annual return of just under 12%.
“Through all that turmoil? No way. Now we know you’re just funnin’ us there JL.”
……..
So, am I predicting 12% returns for the next 40 years? No, of course not.
But I am suggesting 12% annual returns don’t require a perfect Golden Age. They can, and have, blossomed in the midst of turmoil, war, grief and economic collapse.
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Addendum:
From Andy in the comments below — Buffett on Bogle
Addendum 2:
Larry Swedroe provides some needed perspective on the Shiller CAPE 10 and the market’s current valuations.
“…because there’s so much variation over time in the equity risk premium, there isn’t any methodology that will produce highly accurate forecasts of stock returns…”
Addendum 3:
Swede’s article came to my attention in Physician on FIRE’s own excellent post:
Can a Bear take away your Financial Independence
Addendum 4:
The point in the post distilled into a year: 2019. Why you don’t trade on the news
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A while back I had a blast with Brad & Jon on their podcast Choose FI. So we did another:
and their follow-up conversation about it
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A cool game created by my pal Malachi…
One of my personal favorites….
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A good read…
And, of course, my own work is now available as an Audio book