Given this enormous variability, it's hard to be all that sure the expected yearly return is even positive. Suppose we make the extreme assumption that the expected yearly return on the market is zero, and the volatility is equal to the historical average. Even with this very low expected return, we would see yearly returns of 7 percent or more about 36 percent of the time. Maybe the stock market isn't that great an investment, and we've just been lucky. Then there's the market's recent performance.
Economists like to think that stock market prices reflect some underlying fundamentals.
Over the last 100 years, the ratio of the price of a stock to its current earnings has averaged around 14. This leads financial economists like Robert Shiller of Yale to forecast a large drop in stock prices in the next few years, as these ratios return to normal. Another way to assess the 7 percent return is to look at other markets around the world to see whether this sort of return is the norm. This figure represents only the capital gains component of the return, since dividend data is awfully hard to come by, but it is still remarkably small. The German stock market disappeared twice, in 1931 and in 1944.