Investment returns today are dismally low. How long will this last? No-one knows, but FT columnist John Authers discusses the future by looking at the past. He anchors his informative essay on the long-run returns of Austrian bonds and stocks. Austria was prosperous at the beginning of the last century, then had the misfortune to be on the losing side of World War I. Nonetheless, Austria is still a prosperous nation, despite its loss of an empire nearly a century ago.
Today, … [Austria has] the highest gross domestic product per head in the eurozone (after Luxembourg). But its bonds and stocks have been terrible long-term investments.
According to the latest Credit Suisse Global Investment Returns Yearbook, produced each year by the academics Elroy Dimson, Paul Marsh and Mike Staunton, those who bought Austrian stocks just before the first world war would have sat on losses for 97 years. Austrian bonds and short-term bills did worse, losing almost all of their value.
So although a key lesson of this massive research is that stocks usually beat bonds, cash and inflation in the long term, there is a real risk that an investor could wait an entire human lifetime for the investment to pay off. ….
[T]he yearbook is a counsel of despair. Timing the market does not work. The prognosis for the near future is dire. And yet buying stocks and holding them for the long term can leave you with losses almost a century later. ….
[T]here is at least one guarantee in investment, which is the fee you are charged. The less you pay to intermediaries and managers, the better your investment will perform.
So buying into funds that keep costs low … looks like a great idea. Nothing is certain – look at Austria – but the odds are that such a strategy will work out well in the long run.
John Authers, “Austria’s 97 years of loss offer lessons“, Financial Times, 9 February 2013.
Credit Suisse Global Investment Returns Yearbook is an annual publication that now contains data for 25 countries, spanning 113 years of history. The 2013 issue can be downloaded for free at www.tinyurl.com/csgiry2013 Here is an excerpt:
While we have now been living with low rates for several years, many investors still seem in denial, hoping for a rapid return to “normal” conditions. [This is not likely to happen.]
The high equity returns of the second half of the 20th century were not normal; nor were the high bond returns of the last 30 years; and nor was the high real interest rate since 1980. While these periods may have conditioned our expectations, they were exceptional. The [much lower] long-run averages documented in this Yearbook provide a more realistic guide to the future.
The projections we have made for asset returns over the next 20–30 years are simply our own best estimates. They will almost certainly be wrong, but we cannot predict in which direction.
Elroy Dimson, Paul Marsh and Mike Staunton, Credit Suisse Global Investment Returns Yearbook 2013 (Credit Suisse Group AG, February 2013), p. 15.
Professors Dimson, Marsh and Staunton are authors of Triumph of the Optimists (Princeton University Press, 2002).
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