Investments lessons from a truly long-term perspective

Earlier this month, Credit Suisse published its Global Investment Returns Yearbook 2021, an excellent resource that’s chock-a-block with information on how markets have evolved over the very long-term.

The yearbook relies on an analysis of inflation and T-bill, bond, and stock returns for 23 countries, stretching back to 1900. Data has been added from another nine countries for all four metrics going back to the 50s and 70s, depending on the country.

The report provides a remarkably broad perspective from which to understand long-term investment returns and make better portfolio decisions. For example, the yearbook tells us that since 1900 equities have outperformed bonds and T-bills in all markets. Globally, equities have provided an annualized real return in U.S. dollars of 5.3% versus 2.1% for bonds and 0.8% for T-bills.

An important advantage of the report’s broad global perspective is it helps investors avoid becoming entranced by the U.S. market and succumbing to a “success bias” in investment decision-making. Just because the U.S. stock market has performed very well and is by far the largest in the world doesn’t mean it’s the only country we should consider when making investment decisions.

For example, the report tells us that since 1960, emerging markets equities have outperformed developed markets equities by around 1.5% per year. We also learn that emerging markets are growing rapidly in importance. Twenty years ago, they made up less than 3% of world equity market capitalization and 24% of GDP. Today, they make up 14% of global market capitalization and 43% of GDP. The report notes the important diversification benefits of adding emerging markets securities to portfolios.

Here are some other lessons from the yearbook:

• Markets will probably look different a decade or two from now than they do today. Tech stocks won’t always be on top. In 1900, railway companies dominated 63% of the U.S. market and 50% of the British market. In fact, 80% of the industries that made up the stock market in 1900 either no longer exist or are of trivial importance. This puts into perspective how little we can predict about how markets will evolve over the next 10, 20 or 30 years.

• While investing in global equity markets is the most reliable way to earn a return in excess of inflation over the long run, stock markets don’t necessarily make a good inflation hedge in the short run. The premium for investing in stocks over inflation since 1900 ranges from 1% to almost 7% per year across the 23 countries with a full data set. The worldwide market annual premium over inflation is 5.2% since 1900. However, during periods of high inflation (the top 20% of inflation occurrences), stock markets didn’t keep pace with inflation. In other words, a bit of inflation is healthy for business, but high inflation hurts.

• The longest stretch that stocks went without beating inflation in the U.S. was 16 years. The longest stretch that the Japanese stock market went without outperforming inflation was 51 years. The longest stretch that U.S. bonds went without beating inflation was 57 years! In other words, deferring your consumption to a later date doesn’t guarantee you’ll be compensated unless you’re willing to wait. Investing is about patience, not quick hits!

• Over the last 121 years, the Canadian dollar has remained remarkably close in value to the U.S. dollar, when compared to other currencies around the world. However, since the U.S. stock market is so large (56% of global market capitalization) compared to other markets, even relatively small fluctuations in the U.S. dollar versus the Canadian dollar can have a significant impact on a portfolio’s return in the short run for Canadian investors.

There are so many other lessons to be pulled from the data. The yearbook does a great job of grounding our return expectations and is very useful when thinking about your long-term planning. The value of a long-term perspective should be clearer than ever after a year of extraordinary short-term turbulence in global markets.

French link to Credit Suisse https://www.credit-suisse.com/about-us-news/fr/articles/media-releases/credit-suisse-global-investment-returns-yearbook-2021-202103.html