It doesn’t necessarily make it easier to predict the future, but historical market data can help you better understand the potential risks and rewards for different asset classes and strategies.
After all, long-term returns are all that matter.
Jim Reid and his team at Deutsche Bank have mentioned a fantastic report The ultimate guide to long-term investing that has a lot of great return data for nerds like me. They have data on financial markets going back more than 200 years for some countries.
Let’s dig in.
I’ll start with the risks. A few weeks ago I wrote about why I don’t think we can have another Great Depression. In that three-year period, the U.S. stock market fell about 86%.
These levels of losses have occurred in a number of countries around the world and in some cases have persisted for decades:
That’s why they call it a risk premium and not a reward premium.
It’s also interesting to look at the number of times stocks have underperformed bonds or cash over time. This shows the percentage of time that their global dataset of developed countries has underperformed bonds and cash over 5, 10, and 25 year time frames:
It happens more often than you think.
Owning shares is not always easy.
Okay, that’s the glass-half-empty thing that needs to be shown to provide some balance.
Now let’s look at the good stuff.
Here are the G-7 nominal and inflation-adjusted country returns over different time frames for 60/40 portfolios:
For many of these countries, nominal returns are higher than I expected.
Of course, you have to look at these results on a nominal basis – especially the returns in the first half of the 20th century – to get an apples-to-apples comparison.
Yet over the last 50 years you are looking at a range of real annual returns of 4.6% to 6.4% (6.1% to 10.7% nominal). That’s pretty good for a balanced portfolio.
The following chart shows annual stock market returns over the past 50 and 100 years, this time including some emerging countries:
Many bad things have happened to the world in the last 50 to 100 years – wars, famines, pandemics, natural disasters, depressions, energy shocks, etc.
Still, stock markets around the world have risen. This says a lot about the human spirit and our ability to innovate and improve.
Reid also took US stock market returns all the way back to 1800:
I’ve never seen ten-year returns go back so far. Remarkably, there have only been two decades with negative returns out of a total of 23.
It’s also notable that five of the eight double-digit decades have occurred since 1950 (which has also happened in five of the past eight decades).
The long-term financial returns have been quite strong any way you look at it.
Does this mean that these returns will continue into the future?
It certainly doesn’t feel like innovation is slowing down. No one predicted the impact AI would have on markets or the economy this decade. ChatGPT seemingly came out of nowhere, but that’s usually how things like this happen throughout history.
People are concerned about the current state of the world. Then we innovate, solve some problems, create new ones and the cycle begins again.
When it comes to AI, there are many proponents who believe that artificial intelligence will boost economic growth by making most tasks more efficient. That’s certainly possible, although if robots replace most jobs, we’ll still need someone to spend money.
However, there is a growing consensus among others that AI will simply keep us on our current growth trajectory. This is something AI researcher Andrej Karpathy talked about on the website Dwarkesh podcast:
Deutsche Bank also shows historical nominal and real GDP growth for different countries over different time periods:
Look at real GDP growth going back to 1999, when the Internet took off. Growth is around 2%, despite the development of a technology that has made us all more efficient in numerous ways. That is lower than the growth of the past hundred years.
This makes sense when you consider the sheer size of the global economy. Trees don’t grow into the sky. But we still need the economy to grow so that the stock market can grow over time.
I have faith that this will happen in the long term, even if it will hurt a little in the short term to get there.
Further reading:
30 years
#Investing #long #term #wealth #common #sense