One of the enduring myths of 20th century American capitalism is that “anyone can do it”.  Anyone can get rich, that is.  And one of the ways people are encourage to “get rich” is by wisely gambling investing in the stock market.  Unfortunately for countless numbers of people hoping to retire soon, it just isn’t true.  Yes, it’s possible to maybe hit or guess a stock that rises dramatically. You just might get Microsoft in 1984, but it’s not likely.  You were probably just as likely to get Digital Research in 1984.

Here’s an interesting graph (one of many) from James Hamilton, one of the better econometricians of our time.

Figure 2. Green line: Ratio of real value (in 2010 dollars) of S&P composite index to the arithmetic average value of real earnings over the previous decade, January 1880 to Aug 2010. Red line: historical average (16). Blue line: average compounded nominal rate of return on stocks purchased at the indicated date and held for ten years from that date. Data source: Robert Shiller.

Even at today’s supposedly “low” prices following the 2008 crash, PE ratios are still higher than normal.  No values here. Note also that 10-year returns on stocks are now negative. If you’re planning on retirement or saving for a child’s college education, don’t assume you’ll earn the 8-12%’s that the stock brokers and investment advisors claim.

It’s well worth the short amount of time required to read the full article at: http://www.econbrowser.com/archives/2010/08/longterm_perspe.html