- Since 1926 (that’s 92 years of data) equities have returned about 7.5% per annum more than inflation while bonds have returned about 2.5% above inflation. This difference is significant (read “life-changing”) when compounded over long periods and even greater when one considers the relative tax-efficiency of equity versus bond investing.
- This 92-year period is a relatively long period and includes the Great Depression, World War II, the Vietnam and Cold Wars, the Oil Crisis, PW Botha’s Rubicon Speech, Black Monday, the Dotcom collapse, 9/11, the US Subprime crisis and many, many more. It includes extreme periods of boom and depression, war and peace, inflation and deflation and high and low interest rates. In other words, the negative headlines of today are far from unique.
- These greater returns have come at greater volatility risk. Since the second World War, there have been 12 bear markets where markets have fallen greater than 20% from their highs. These falls have ranged between negative 20% to negative 57% and markets took between 3 months and 3 years to recover.
- Over one year rolling periods, equities have been positive 75% of the time (or been negative once over 4 years), over 3 years 83% of the time, over 5 years 87% of the time, over 10 years 94% of the time and over 20 years 100% of the time. While equities are much more volatile in the short-term, over time this risk reduces substantially.
Nick Murray a leading US behavioural investment counsellor wrote in his book Simple Wealth, Inevitable Wealth, “It is the age-old, never-ending emotional battle between fear and faith in the future. No one is asking you not to feel the fear, because there are very few of us who ever actually become immune to that emotion. You have to be who you are, and you have to feel what you feel. You simply have to refuse to act on the feeling.”
Today, investors face much negative news. The important thing to remember as we embark on 2020 is that much of this negative reporting is true but not unique in history. As in the past, the greatest risk for the long-term investor is likely not the risk of owning equities but instead the risk of not owing enough equities.
Wishing you all a prosperous and healthy 2020. Happy investing.