Over the period from 1802 through 1990, equity has provided returns superior to those on fixed income investments, gold or commodities. Most strikingly, the real rate of return on equity held remarkably constant over this period, while the real return on fixed income assets declined dramatically. Over the sub periods 1802-70, 1871-1925 and 1926-90, the real compound annual returns on equity were 5. 7, 6.6 and 6.4 per cent, but the real returns on short term government bonds dropped from 5.1 to 3.1 and, finally, 0.5 percent.

The magnitude of the excess return on equity, especially during this century, appears excessive relative to the behavior of other macro economic variables. In the future, the real return on fixed income assets may be closer to the historical norm of 3 to 4 percent. While stock returns will probably continue to dominate bond returns, they will not do so by nearly as wide a margin as they have over the past 65 years.