The idea of long-term investing is a foreign concept to most investors. Even though almost all of the investors participating in markets today will have heard of long-term investing, most of the time investors consider a long-term investment something they hold for a year or more.
In the grand scheme of things, holding a stock for a year is not a long-term investment; in fact, it is quite the opposite. If you are investing for retirement and have 30 years to go, one year isn’t going to make any real difference to your long-term wealth (unless you lose everything).
Long-term investing takes a lot of willpower (even though it requires almost no effort on the part of the investor), but the returns over time can be astronomical.
Credit Suisse’s "Global Investment Returns Yearbook," which is published every year, makes quite clear the case from long-term investing and how it can transform your wealth. Last year the bank’s analysts looked at the performances of industries over the past century and reached some interesting conclusions. This research was conducted by studying the returns of stocks since 1900. Granted this is an investment horizon no investor will be concerned with, but the data revealed does highlight how important it is to invest with a long-term outlook.
Perseverance
The 20th century was an eventful period. Two devastating world wars, the complete transformation of Europe, the rise of America as a superpower, the Great Depression, the first use of nuclear weapons, the rise of communism and fascism and the Cold War all took place within this relatively short space of human history. But despite all the devastation, political change and economic turbulence, stocks remained a reliable source of wealth creation.
A dollar invested in the U.S. market at start-1900 would have grown, with dividends reinvested, to $38,255 by end-2014, representing an annualized return of 9.6%.
In many ways, this return for U.S. equities is not surprising. At the end of the first and second world wars, the U.S. was the only economic power left standing, and the size of the economic stimulus created by the global rebuilding effort certainly had a positive effect on equities. So how did the U.K. market fair? U.K. equities, which were at the center of both world wars, turned 1 pound in 1900 to 30,444 pounds ($37,212.9) by the end of 2014 and analyzed return of 9.4%. Out of interest, during this 114-year period, the German stock market returned 3.2% per annum, and the Japanese market returned 4.1% per annum despite nuclear attacks.
Of course, the world has changed significantly since 1900, and the investment performance of each investor over the past 114 years will have varied considerably depending on the sectors in which they had an interest. If ever there was an argument for indexing your investments, this is it.
The sectors that perform best
Between 1900 and 2014, the worst-performing U.S. stock market sector was shipping. One dollar invested in shipping stocks back in 1900 would have been worth $1,225 at year-end 2014, an annualized return of just 6.4%. The best-performing sector, on the other hand, was tobacco. Since 1900 U.S. tobacco stocks have generated an annualized return of 14.6%, turning $1 into $6.2 million, more than 500,000 times as much as the return from shipbuilding and shipping.
Shipbuilding and shipping investors should be happy with their lackluster annualized return of 6.4% as some sectors have disappeared altogether since 1900. Indeed today, the tech industry has replaced the textiles and telegraph industries while rail stocks as a percentage of the market’s total market capitalization have decreased from two-thirds (1900) to less than 1% today. Even starker is the revelation that of the U.S. firms listed in 1900, more than 80% of their value was in industries that are today small or extinct; the U.K. figure is 65%.
The bottom line
What’s the takeaway from all of this? For a start, if you want the best long-term returns tobacco may be the sector to go for, but apart from that this data shows that for most investors indexing is the way forward. Stocks can achieve high single-digit returns over the long term no matter what the world throws at them, but picking stocks and sectors is a precarious game.
Disclosure: The author does not own any share mentioned.
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