Long-term sharemarket trends that should guide your investments

Analysis of 122 years of data reveals long-term sharemarket trends that provide real insight into reducing sharemarket risk and improving gains.

One of the things people interested in investing can suffer from is what I call ‘short-termism’; where we follow the day-to-day but don’t often sit back and get the big picture.

That’s why the Credit Suisse Global Investment Returns Yearbook is so good at giving us that long-term perspective. It’s a collaboration with London Business School, and covers all the main asset categories in 35 countries. Most of these markets, as well as the 90-country world index, have 122 years of data since 1900. So the study is based on great data.

Australia ranked #1 in real local currency terms

The study found Australia has in real local currency terms been the world’s best-performing equity market over the past 122 years. In USD terms, it is second-ranked world-wide, after the US.

One AUD invested in the equity market in 1900 would be worth AUD 3,192 today. The Australian stockmarket has achieved an annualised real local currency return of 6.8 per cent and a real USD return of 6.6 per cent per year since 1900.

Now that is seriously impressive.

Long-term sharemarket trends

Some of the other little gems that came out of this incredible research study are:

Equities perform better than bonds or cash

Equities have performed best of all investment asset classes over the long run. Over the last 122 years, global equities have provided an annualised real USD return of 5.3 per cent versus 2 per cent for bonds and 0.7 per cent for cash.

Equities have outperformed bonds, cash and inflation in all 35 markets. Since 1900, world equities outperformed cash by 4.6 per year and bonds by 3.2 per cent per year.

20 years to double your money

Equity investors would still expect to double their money relative to short-term government bills in 20 years.

US best performing stockmarket

Since 1900, the US has been the best performing stockmarket with an annualised real return of 6.7 per cent. The US market’s share of the total global sharemarket has quadrupled to an astonishing 60 per cent.

Diversity improves return-risk trade-off

Interestingly the study found diversification across stocks, countries and assets has greatly improved the return-risk trade-off.

Prospectively, the benefits remain large. It found diversification reduces risk so investors can earn the same return at lower risk, or a higher return for the same risk. The authors refute claims that 10–20 securities can ensure high diversification.

It’s become easier to invest globally

Globalisation has made it easier to invest internationally. Over the last 50 years, global investment generated higher reward-to-risk ratios than domestic investment in most countries.

But the US is the exception. Over the last 50 years US investors would have been better off investing domestically. This reflected excellent returns and lower US stock market volatility.

To reduce portfolio risk, the authors of the Yearbook advise all investors – including those in the US – to invest globally. Diversifying across all asset classes will further reduce risk, as well as staying in the market during bear markets and times of crisis.

Importance of historical learnings

Professor Paul Marsh of London Business School, who co-authored the Yearbook, confirms the importance of considering long-term sharemarket trends in decision making.

“Learning from financial history and using it to shed light on issues facing investors has never been more important,” he says. “As we navigate through increasing inflation, and an impending reassessment of global monetary and fiscal policy, our research provides the evidence to underpin investment strategy for the future.”