Practical analysis for investment professionals
19 December 2013

The Paradox of Wealth: Economic Growth Lowers Security Returns (Podcast)

In his 2012 Financial Analysts Journal article, “Fewer, Richer, Greener: The End of the Population Explosion and the Future for Investors,” Laurence B. Siegel shares his optimistic view on the continued growth of the world economy. But according to William J. Bernstein, such optimism should not be applied to security returns. In his September/October 2013 FAJ Perspectives article, “The Paradox of Wealth,” he argues that both theory and empirical data support the idea that economic growth lowers security returns.

I recently got the chance to talk with Bernstein about his research.



“I’ve always been fascinated by and somewhat skeptical of the connection between economic growth and security returns,” Bernstein says, adding that he wanted to approach the issue from a historical perspective. “When you look at the broad sweep of history, it seems that both the equity risk premium and the risk-free rate have been decreasing over the past couple of centuries.”

In his article, Bernstein argues that as societies become wealthier, they become less “impatient” for consumption because of improved food supply, housing conditions, and lifespans. Drawing on the work of Ian Morris, Bernstein explored measuring societal well-being, or wealth, in terms of energy consumption per day per person. “What I came up with was a fairly convincing inverse relationship between per capita energy consumption and at least the risk-free rate, which is the one that is more historically available,” he says.

To hear Bernstein discuss his article and its practical implications for investors, listen to the complete interview above or download the MP3.

CFA Institute members can also access the full article on the CFA Institute Publications website.


Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

About the Author(s)
Abby Farson Pratt

Abby Farson Pratt was an assistant editor at CFA Institute. Previously, she worked at the Denver Post and at the University of North Carolina Press. Pratt earned the Claritas™ Investment Certificate and holds a BA in journalism and English from the University of North Carolina at Chapel Hill.

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