From 1872 until 2001, stocks on average achieved a compound annualized return of 9.1%. Of this percentage amount, dividend payouts accounted for some 4.8%, or about one-half the long-term return. And looking at more recent history, the market returns of the 1980s-1990s combined to produce the best 20 year results in the some 140 year history of the U.S. stock market. The success of these two decades is evident in that this was also the first time in the history of the domestic stock market that returns exceeded 10% in successive decades. However, because of the extraordinary asset inflation these two decades produced—particularly pronounced leading toward the Millennium—the 2000-2002 stock market decline was the third worst consecutive-year downturn in the history of the stock market and the worst since the Great Depression.
As can be seen from the table below, particular equity classes do exhibit out-performance characteristics over various time horizons, e.g., small companies versus larger ones. But the shorter the time frame, the more uncertain it can be in judging when certain equity types will outperform. Typically, the higher the relative return, the more risk or volatility (called standard deviation in statistical terms) can occur in the short run—and small company stocks are more volatile than large ones and a value stock can either be a hidden jewel waiting to be discovered or one headed towards the trash bin. Knowing when and how to balance equity asset classes as well as cash and bonds is largely what professional money management is all about. Some research shows that over 90% of equity performance in a given portfolio is due to asset allocation and not individual stock selection. Getting this balance right is more important than stock picking.