William Bernstein – in the Financial Analysts Journal – claims that investment returns decrease as society becomes wealthier.

I stumbled over this.  Why would that be?  

But he makes a compelling case.  When we talk about investment returns from the POV of the user of the capital, we talk about the “cost of capital.”  This is what we have to pay the capital holder in order to use their funds for a while.  For a bond, the cost of capital is fixed ahead of time.  For equities, the return/cost is unknown….but it has no upper limit.

The key here is that we have to persuade someone to part with their capital, which means they can’t buy a second home or a boat or anything else.  In a poor society, it’s hard to persuade someone to give up their capital…since the majority of society is struggling to afford the essentials.

But – as wealth increases – people have more capital to play with.  And they’re more easily persuaded to give it up for a while.  Thus, lower cost of capital.  And lower long-term returns for investors.