gary, there is an upward survivorship bias in most reported stock returns. This is true for mutual fund returns and returns by country.
I am not sure I buy into the idea that the S&P 500 has one, though. When one company replaces another in the index, let’s say because the old company was doing poorly, then the index has already dropped to reflect the poor price performance of that stock all the way up the day that it’s thrown out of the index. And if the new company was included because it was doing very well, none of the corresponding stock gains would be included in the index. The index only reflects future gains from the new company.
Even if you argue that a company that has been ailing for a long time will tend to underperform in the future, and vice versa for strong companies, you can always replicate the resulting good index performance in your own stock portfolio by simply selling all the stock of the companies that are removed from the index on the day they are removed, and using the proceeds to by stock in the new companies.
But I do like your insight into what drives stock prices in the aggregate economy, in the very long run. In the aggregate long run, the actual cash that companies hand over to their owners, in the form of dividends and stock buybacks net of dilutions from employee stock options/grants, is all that owners get. If a law were passed tomorrow disbarring any company from paying cash to its owners (in dividends or buybacks) then all public companies would become worthless overnight.
In good times, when stocks are overpriced, then dividends and buybacks tend to be overlooked as the basis for valuing a company. In bad times, dividends and other real cash become the basis. I actually use this as a one barometer of market sentiment. Company managements have a tremendous incentive to emphasize non-cash earnings, since then they are essentially raising capital without having to fight hard to prove they will return all that capital with interest.
So finally, what can you expect to earn from stocks? Nominal price growth that is very unpredictable and cyclical, but should revert over time to the nominal growth of the economy, plus your share of the total stock buybacks made by the company… less dilution caused by employee stock compensation… plus dividends. Actually, you should also deflate the growth in the economy in total for IPOs and other capital-raising efforts by companies in the aggregate. So add dividends to davelj’s 5.5% and adjust for buybacks, ee option grants, IPOs etc to your taste. Over long periods, those add up to a negative, I believe.
