Shares for the long run
‘Successful investing takes time, discipline and patience. No matter how great the talent or effort, some things just take time: You can’t produce a baby in one month by getting nine women pregnant.’ – Warren Buffett
One big mistake investors make is to pay excessive attention to the short-term movement in share prices. The reality is that, while the prices of shares (also known as equities) do fluctuate significantly on a short-term basis, over the long term, they tend to deliver better returns than most other asset classes.
Professors Elroy Dimson (Cambridge), Paul Marsh and Mike Staunton (London Business School) have compiled historical data on major asset class returns going back to 1900. This gives us 118 years of data on major asset classes (equities, bonds, bills), inflation and currency for 23 countries and three regions (World, World ex-US and Europe).
Let’s be clear, this data doesn’t help us predict future returns with any degree of accuracy. However, it provides a colourful perspective on the behaviour of asset classes under a very wide range of market conditions, from the best of times to the worst.
The chart below shows that on average, equities delivered a higher inflation-adjusted return than bonds and cash, in all 21 countries with continuous data, World and World-ex US.
As the authors noted,
‘The real equity return was positive in every location, typically at a level of 3% to 6% per year. Equities were the best-performing asset class everywhere. Furthermore, bonds beat bills in every country except Portugal. This overall pattern, of equities beating bonds and bonds beating bills, is precisely what we would expect over the long haul, since equities are riskier than bonds, while bonds are riskier than cash.’
Of course, this research doesn’t account for the impact of fees on returns. It merely illustrates that over the longer term, equities tend to deliver better returns than bonds, cash and inflation.
The period examined in this research included two world wars, the great depression of 1929, several recessions and various traumatic economic events. Notwithstanding, equities delivered a tidy return.
This is why we encourage our clients to pay little attention to short-term market movements and focus instead on the long term. As legendary investor Warren Buffet notes, an investor’s favourite holding period is forever. Clearly, many of us haven’t got the luxury of 118 years or a holding period spanning ‘forever’ but our investment time horizon should be measured in decades, not days, weeks or months!