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First, what is the difference between a nominal return and a real return? Basically, the real return is the nominal return with the inflation rate subtracted out. It is usually about 3-4 percentage points less than the nominal one. Your figure of 10.5% for the stock market return is the nominal one. The real return for stocks is about 6%. The 3.5% is the real return, not a nominal one. (NB- the author uses a real historical return of 7%)

Second, there have been three 20-year period's where the stock market returns have been a real 0%. Two of them did not involve the Great Depression. 1900-1920 and 1962-1982 did not involve prolonged economic distress. The standard deviation on returns is about a real 3% by the way.

This is a very incorrect. I agree that the real rate of return over the past 75 years is about 3% less than the nominal rate, but this doesn't work on smaller periods. Taking 3% of the rate of return in the Depressions doesn't make sence since the country was suffering from deflation not inflation, thus the real rate of return should be INCREASED not decreased. The worst period (which you have) is the period which includes the 70's to early 80's because of the skyrocketing inflation of the period. Of course this period was imediately preceeded and was succeeded by periods of rapid growth with low inflation. It balances out.

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