Equity Risk Premium and Likely Future Returns: Elroy Dimson's History Lesson

Highly recommended: Rethinking the Equity Risk Premium, Elroy Dimson's free (registration required) audio and slide presentation that says investors should expect no more than 3-3.5% annual real returns from equities over the riskless rate aka government bonds, which currently is more or less 0!

Noted academic and equity researcher Elroy Dimson (best-known as co-author along with Mike Staunton and Paul Marsh of the yearly investor treat called the Credit Suisse Global Investment Returns Yearbook, 2012 edition here) has been at it again, producing well-explained, substantial commentary on a supremely relevant topic - how much return have investors achieved around the world and what should one expect from equities in future?

Other notable points in the presentation:

• the equity risk premium has not been constant over time, or from country to country, though equities have substantially outperformed bonds over the past 112 years in every single one of the 19 countries for which they have data (slide 19)
• over the very long run (100 years or so) currency shifts between countries have barely mattered to equity returns for an international investor (using the USA investor as the example) ... though it has mattered a lot over short periods (slide 17 c. 21 minutes along)
• most (or all, in some countries) of long-term real equity return comes from reinvested dividends (slides 20 and 222)

There's more fascinating and potentially useful stuff on such topics as - do higher or lower GDP growth countries give better equity returns, do weak or strong currency countries give better equity returns, do high or low dividend markets foretell better equity returns? Here's one of Dimson's slides that reinforces the idea that "valuation matters", at least in the form of dividend yield (as this post on my other blog showed, the current Canadian yield around 3% is around the the historical average):

There's also a background paper with the same title (likely to be heavy reading; though I haven't yet read it, I'd bet it's worthwhile), also free from the CFA Institute.