Research shows that people react more to stories than to numbers. But numbers can spin meaningful yarns as well. What follows is a numerical tale that should piqué the interest of investors unsettled by the return of volatility to the stock market in recent months.
Thanks to some serious numbers-crunching by London Business School professors Elroy Dimson, Paul Marsh and Mike Staunton, it’s possible to compare the long-run performance of asset classes whose returns are notoriously tricky to calculate. Of course, as the famous economist John Maynard Keynes once reminded us, “In the long run, we’re all dead.” Yet knowing how various asset classes performed over time provides perspective through which to view the volatility that often causes investors to overreact and move against their best long-term interests.
The authors analyzed historical returns from a diverse array of assets, including stocks, bonds, wine, art, violins, metals, stamps and real estate. A 40-page summary of their findings, derived from data covering 118 years in nearly two dozen countries, is published by the Credit Suisse Research Institute and is available free online.
Following are major takeaways from the research:
- Since at least the dawn of the 20th century, there has been no better way to beat inflation that by owning a business. Which, of course, describes shareholders of publicly traded corporations. Since 1900, U.S. stocks have bested inflation by 6.5% a year, with the average stock’s purchasing power increasing 1,654-fold over those 118 years. No other asset class came close to that number.
- The research sheds needed light on the increasing popular method of constructing portfolios based on any of over 300 individual “factors,” such as dividends, momentum and long/short strategies. Though the data confirms that factor investing can generate significant out performance, there also have been sharp reversals that caused negative returns for extended periods. Market conditions change, so don’t put all your chips on a single factor unless your crystal ball is unusually clear — and who’s got one of those?
- There is nothing in the historical record to suggest that owning prized artwork, fine wine, a classic car or a Stradivarius violin is a road to riches. Still, “passion investing” is a not a fool’s game either, with the purchasing power of the average collectible increasing by 2.9% per year since 1900.
Finally, for those worried that equity market volatility is necessarily a prelude to steeper declines, the evidence suggests otherwise. “Episodes of volatility akin to those we are witnessing [in 2018] are hard to predict, tend to revert rapidly back to ‘normal’ volatility, and have little predictive ability for future market returns.”
In other words, tune out the noise and stay focused on what works. Which, for many long-term investors is owning shares of consistently profitable, well-run businesses.