A look at the history books signals a brighter future for equity investors, writes Algernon Percy, manager of the JOHIM Portfolio fund.
During the last few years, the determined efforts of economic historians and the exponential growth in computing power have created a surprisingly comprehensive history of stock market indices back to the year 1800.
While the first hundred years or so are inevitably less detailed in scope than more recent times, there is nevertheless enough data in the US since 1800 to calculate the returns investors have achieved over all time periods since then. In the UK, we have a sufficiently full and accurate set of data to determine valuation and dividend yields, as well as returns, going back to 1900.
Two remarkable truths come out of analysis of the long run returns on the US stock market. Firstly, looking at all possible 30-year time periods in the past 200 years, the average return including dividends, over and above inflation, has been remarkably constant at 6.5% before costs. Secondly, although on a year-by-year basis equities have been high risk, those with long-term time horizons and diversified portfolios have not been subject to much risk at all.
Back to the future: equities are coming full circle
Almost never has an investor in the US stock market with a 30-year time horizon made as little as 4% real per annum; and equally seldom has the investor been rewarded with as much as 10%. Over the vast majority of 30-year investment periods the real return has been between 5% and 7%.
The real killer for long-term returns has been permanent capital destruction – usually caused by war or government confiscation; it is worth noting that the analysis outlined above does not work in respect of Russia, China or even some Western European countries.
Coming full circle
Another interesting observation for today’s investor is that extended periods of poor returns have invariably been followed by long periods of above average returns. While we may not be at the end of this particular fallow period, we are surely nearer the end than the beginning given that stock markets generally peaked well over a decade ago.
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