Bogle starts Common sense on Mutual Funds with a lesson on the long term nature of capital markets. He quotes from the book/movie Being There – about a reclusive gardener for a wealthy man. when the wealthy man dies the gardener, named Chance, is mistaken for the rich man by an advisor for the president. Chance is asked for advice on the troubled financial markets by the presidential advisor. Chance can only answer with what he knows. He says that “growth has its season. There are spring and summer, but there is also fall and winter. And then spring and summer again. As long as the roots are not severed, all is well and all will be well.”

This is a great allegory of our capital markets. there will be ups and downs and periods of stagnation, but as long as the roots of our governments and financial systems stay intact, we will be rewarded as long term investors.
Bogle demonstrates that since 1800 our nation has been through many recessions, depressions, a civil war, 2 world wars and many other difficult times. But over that period we have seen the following:
* Stock Market returns of 8% (6.9% real – adjusted for inflation). The volatility of this return has shown returns as low as -48.4% and as high as 61.4% .
*Long Term US Treasury Bonds have had returns of 5.1% (3.6% real) with a volatility that ranges from -21.9% to a high of 35.1%.
Then Bogle goes on to demonstrate that over long periods of time, the swings in a market portfolio of stocks is dramatically reduced. In any given year an investor can and WILL experience the dramatic swing in returns (winter, spring, summer, fall).
holding stocks for the last 15 years would have resulted in a 6.9% real return (4% standard deviation). Holding stocks for the last 25 years would have netted a real return of 6.9% and a 1.4% standard deviation.
Standard deviation is a measure of volatility. A standard deviation of 4% means that 66% of the the fall within 4 of the 6.9% 15 year return. So, 66% of the time the returns were between 10.9% and 2.9%. It also means that 95% of the returns were within 2 standard deviations of the average.
The lesson is that for young people investing for retirement, for trusts and foundations, who all have a long term horizon, one can expect a historical return of 6.5% and long term standard deviation of 1% if they stay in the market.