Buy and hold for the next decade

As I note in "Market breath is bad and deteriorating"  on 11/17/2014, now is not a good time to buy stocks:There is a strong risk that stocks will be lower in one year time frame. Long term buy and hold investors have different horizon. What can they expect for the next decade?

In the long run, the investment return is sum of dividend return and price change. In long term, the price tends to mean revert to value. This allows estimation of the long term stock market returns shown in Figure 1.

Figure 1: Modeled and actual historical stock market return (dividend + price change).

The model is not perfect (how could it be?) but correlation is significant. Based on this, the annualized return for the next decade is about 5%. This is well below historical returns as the stocks are overvalued compared to historical norm. As shown next, this may actually be the Goldilocks case. 

The inflation adjusted historical returns are lower. Shown in Figure 2, adjusted for inflation, the stock market returns can be negative for a long period of time. The 70's high inflation was a investment equivalent of hell. This is the real danger of buy and hold in the current environment: Should the central banks succeed in releasing the inflation, the future stock returns could significantly underperform the model return of 5%.  

Figure 2: Modeled and actual inflation adjusted historical stock market return (dividend + price change).