What medium-term returns should we expect on equities?
The standard way to answer this is to assume that the future distribution of returns will resemble the past. For example, since 1900 annual total returns on UK equities after inflation have averaged 5.6 per cent a year with a standard deviation of 19 percentage points. With a few assumptions and some simple maths, this allows us to estimate the probability of future returns. It tells us, for example, that there’s around a four-fifths chance of some kind of positive return over five years and almost a 90 per cent chance over 10 years.
Sadly, however, such calculations are questionable. They rest upon a dubious assumption – that returns are ergodic.