Story of the month
Three British economists – Paul Marsh and Mike Staunton of the London Business School and Elroy Dimson of Cambridge University – have undertaken a painstaking task : they have traced 35 stock markets around the world back as far as possible to test a core theoretical investment question. Do equities really outperform all other asset classes over the long term ?
WE DRAW FOUR KEY CONCLUSIONS FROM THIS STUDY AND OUR OWN EXPERIENCE :
- The proposition that equities should be an indispensable part of a long-term investment strategy over a long period of time is well supported by empirical evidence. The three economists show that US equities have returned an arithmetic average of more than 8% per year in real terms, after inflation, since 1900. Investing in equities early and for the long term means that you benefit from the compounding effect for longer. In addition, the risk of loss from equity investments is significantly reduced if investors invest their capital over the long term rather than speculating in the short term. From 1970 to 2023, an investor who invested in the MSCI World at the end of a month and held the investment for 15 years has never lost money, excluding inflation. However, past performance is not a reliable indicator of the future.
- In 1900, Germany accounted for 12.6% of the world stock market. Today it is only 2.1 per cent. But this decline is not just because the German economy has not performed well over the long term which is unfortunately true in times of war and misguided economic policy) and because many stock markets have been added (which is also true over the long term). No, the main reason is that the US stock market has become so incredibly important. This argues in favour of global diversification and not neglecting the US market because of the high return on equity of American companies.
- People keep telling us not to invest in equities now because it is the wrong time to get into the market. This is expressed in fatalistic statements such as “The market is at an all-time high”. We think this is wrong. According to calculations by the US broker Charles Schwab, a record high is not an exceptional event : between 1928 and 2021, the US S&P 500 stock index closed at a record high on an average of 14 trading days per year. Selection is more important than short- term timing. We invest in stocks that create long-term value for their shareholders. This is the case when the return on capital exceeds the cost of capital and sales are growing.
- A few good days make the difference between a mediocre portfolio and an outstanding one. An investor who invested in the MSCI World Net Total Return index from mid-April 2004 to mid-April 2024, including dividends, would have seen an average annual return of 7.9% if he had been fully invested for the entire 20-year period. However, if he had only missed the ten days with the highest daily gains over that period, his return would have shrunk to 6.8% per annum. And if he had only missed the 40 bests of those 5220 trading days, his return would have been half as much at 3.5% per annum. This is because he runs the risk of having to liquidate his equity positions at an inopportune time and realise any losses that may have occurred in the meantime. Equities are a powerful tool for long-term wealth creation, which is why they play a key role in the portfolios of our multi-asset funds. However, past performance is not a reliable indicator of the future. This is especially true today in an environment where markets are experiencing increased volatility due to rising geopolitical risks.
