Throughout my studies I've seen 8-10 percent and always thought sarcastically: "yea historically" I could not agree more that the 10% stock market return hypo can mislead early students of economics or business. Now if only we can start teaching students the concept of compound interest and the like at an earlier academic level.

If we really want to assume an 8% return, we should at least be honest enough to note that it's a nominal one.

If you look at Malkiel, large returns tend to come when present (not projected) earnings are running at a stock market P/E below 12--15 at the highest.

With EBITDA (i.e., what we would be making if we didn't run the company the way we do), "forward earnings" (what we think we're going to make), and a current P/E closer to 17-20, anyone who wants to bet on an "equity premium" is welcome to do so--but they shouldn't bet their retirement income on it.

Capital is, by definition, money you can afford to lose. The U.S. stock market ceased to be a "capital market" when people were allowed to bet their retirement savings in it, and the shifts that have made the "8% return" about as realistic as being able to buy Treasuries with that type of coupon at Par haven't been reflected in textbooks.

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@ Ken Houghton

I think the key factor to look at for stock market returns is the ratio of capital to entrepreneurship. Entrepreneurial activity is the pipeline through which capital needs to flow. If a society is not generating entrepreneurs fast enough, or funneling capital to them efficiently enough, then the system will back up and P/Es will begin to rise (though capital flows have many determinants and are certainly much more volatile than the entrepreneurship end of the equation).

The policy insight then is that we need to incentivize a higher proportion of small-scale high-risk (a la angel/venture capital) capital investment. This is after all the breeding ground of entrepreneurs. The more players we let on the field, the broader our entrepreneurial base, and the greater the scale of investment opportunity.

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