Investors are always being told that they need to invest for the long term. These statements are usually backed up with data from studies showing investment returns over the past decade or two and how they are higher than they would be if an investor traded in and out of the market.
While it is true that every investor should look to the long term when seeking the best investment returns, most of the studies on the subject do not do enough to show the benefits of long-term investing. When I talk about long-term investing, I’m talking about most people would call ultralong-term investing of three, four or even 10 decades. If you consider the fact that many people start saving for retirement between the ages of 20 and 40 and live 80 years or more, an investment time frame of four decades or more should not be the exception; it should be the norm.
Studying data of this duration really highlights how important it is for investors to invest with a long-term outlook. And one of the best studies on this topic is compiled every year within the Credit Suisse Global Investment Returns Year Book.
Ultralong-term investing
The Credit Suisse Global Investment Returns Year Book looks at investment returns of several asset classes for every major country and economy between 1900 and 2017. During this period the world has gone through radical changes including two devastating world wars, multiple economic crises, regime changes and two industrial revolutions. Across the 117-year period, Credit Suisse analyzes 70,000 days of financial market history and 2,400 country-years of data across 21 countries, and the results are surprising.
For example, the data show that over 117 years from 1900 to 2016 the real return on the world index was 5.1% per annum for equities and 1.8% per year for bonds. This return includes the total loss of the Chinese market and Russian market when both countries became communist in 1949 and 1917. The U.S. accounts for most of the global market’s return over this period. Excluding the U.S. the real return on the world equity index was 4.3% per year, which is 2.1% per year below that for the U.S. This suggests that, although the U.S. has not been the most extreme of outliers, it is nevertheless important to look at global returns.
Until recently, most of the long-run evidence cited on historical investment performance drew almost exclusively on the U.S. experience. Since 1900, equities and government bonds in the U.S. have given annualized real returns of 6.4% and 2.0%. However, the U.S. markets can only trace their history back to 1792. At that time, the Dutch and U.K. stock markets were already nearly 200 and 100 years old. Even though today U.S. equity market capitalization comprises 53% of total world market value, it was late on the scene when U.S. stock markets were first established.
Moving away from the U.S., some of the most interesting long-term returns data comes from central Europe and Asia, two regions of the world that have been devastated twice by global conflict in the past 100 years.
For example, Japanese equities have returned 4.2% per annum on an inflation-adjusted basis since 1900; this is despite the fact that by the end of World War II Japanese stocks had lost 96% their real value. From 1949 to 1959, Japan’s “economic miracle” began and equities gave a real return of 1,565%.
Germany’s performance has been even more impressive. During World War I German equities lost two-thirds of their value, then between 1922 and 1923 inflation hit 209 billion percent. In World War II and its immediate aftermath, equities fell by 88% in real terms while bonds fell by 91%.
After this tremendous destruction of wealth from 1949 to 1959 German equities rose 4,337% in real terms as the country became the powerhouse of Europe. Despite everything, from 1900 to 2016 German equities produced a real return of 3.3% per annum.
The Netherlands is arguably the birthplace of securities trading and was the world’s main center for stock trading in the 17th and 18th century. It’s fitting then that the country’s equities have produced a real return of 5% per annum over the last 117 years and 7% since 1967, among the highest returns in the Credit Suisse Yearbook. The South African market takes the title of the best-performing market in real terms with a real annualized return of 7.2% since 1900, 7.5% since 1967 and 8.2% since the year 2000.
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