Good news for most. Share investing is still working. Capitalism is still delivering for stockholders. The latest Global Investment Returns Yearbook from academics at the London Business School and the University of Cambridge, alongside UBS (which rescued this authoritative study from the ashes of Credit Suisse), finds that very-long-run, inflation-adjusted total returns from equities across the world inched a bit higher last year.
Average real global share returns since 1900 are now put at 5.1 per cent a year. Last year’s surge in stock prices nudged up the 124-year average across 90 countries from 5 per cent in 2022, getting it back to the 5.1 per cent recorded at the end of 2021.
Over the years, the number has bobbed about a bit, but not much. At the end of the 20th century, it was 5.6 per cent, but the twin impacts of the bursting of the technology bubble in 2001 and 2002 and the banking crisis in 2007-08 resulted in it subsiding to as low as 4.8 per cent by 2008.
Whatever the regulators may say about the dangers of reading too much into past performance, this is a touchstone number that underpins capitalism. It justifies the entire long-run savings industry in favouring risk assets such as shares over government bonds or bank accounts. There are no guarantees, but the channelling of most people’s pension contributions into shares can be justified only by extrapolating this kind of number decades into the future.
While the securities industry is focused on the frenzy and noise of day-to-day markets, it is optimism about the very-long-run trajectory of share returns that keeps the show on the road. And a real return of 5 per cent a year is still fabulous compared with bonds (1.8 per cent) or cash (0.5 per cent).
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Of course, end-investors never quite see this return. The menagerie of creatures feeding all the way along the food chain (financial advisers, fund managers, brokers, consultants and lawyers) siphon off a significant chunk. The £426 million provision made by St James’s Place yesterday to compensate overcharged clients is a reminder of how this can become unacceptable predation. Perhaps, across the industry, a percentage point is swallowed in fees and trading costs, so actual real net returns are probably more like 4 per cent a year.
Long-run history that smooths and strips out the day-to-day noise of markets is so important. It tempers both the excessive expectations of investors, but also soothes their fears and suspicions. Charlie Munger, Warren Buffett’s mentor and business partner, once said: “There are answers worth billions of dollars in a $30 history book.” Short-term market movements, by contrast, are dangerous, tending to pull in or put off end-investors at exactly the wrong time.
That evidence of strong but patchy long-term progress plays a crucial role in reassuring investors that, even after a calamitous crash, they have a good chance of recouping all their losses and much more, so long as they stay patient. Investors were back in the black 15 years after the 1929 Wall Street crash, ten years after the 1970s oil shock and five years after the banking crisis. In the context of a 50-year retirement saving cycle, that’s not so terrible.
Adjusting for inflation is important, too, and a factor largely glossed over by the investment industry. Right now it is crowing over the rally on Wall Street that in recent weeks has pushed the S&P 500 to all-time absolute highs, but real returns have been less impressive.
Indeed, the UBS report points out that after adjusting for inflation and even after adding in dividends, investors are still in the red compared with the high point of November 2021. By this measure, America has still not fully escaped from the bear market of 2022.
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Better public understanding of past long-run returns from securities is important. That 4 per cent or 5 per cent figure should be seen as a handy yardstick that should inform everyone’s thinking. Any investment adviser who promises or implies much higher returns may well be a charlatan or a fraudster. Any investor who prefers the so-called safe haven of a bank account for their retirement savings should at least be aware of what they stand to miss out on. This kind of basic knowledge should be at the heart of financial education.
Instead, the government’s big new wheeze to widen share ownership and improve public understanding of the stock market is a cut-price offer of shares in a single company (NatWest) at a single moment in time with an implicit message that there are quick “stagging” profits to be made at the expense of taxpayers. Not good.
There are other fresh insights in the report, with some myths exploded. Worries about the dominance of the United States and concentration risk may be overdone. Today, the US accounts for 60.1 per cent of the equities universe, but this is well down on the 70 per cent reached in the 1950s and 1960s when companies like General Motors and General Electric dominated just as much as Apple and Microsoft do today.
One remarkable finding is quite how much of the long-run returns from share ownership come in periods when central banks are cutting interest rates. From 1914 to 2023 in America, equity returns averaged an annualised 9.4 per cent in years when policy was being eased and only 3.6 per cent during tightening phases. The pattern has been even stronger in the UK since 1930, with all equity returns in excess of gilt returns taking place in easing phases.
For those who believe that inflation is largely defeated and that interest rates are on the way down, that is an encouraging “buy” signal, although it is fair to say that markets seem to have jumped the gun already in anticipating all this.
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This kind of market timing is much harder than it sounds. Patience and compounding are the really potent forces in successful investing. Munger, who died last year aged 99, had plenty of experience of that. “The big money is not in the buying and selling,” he once said, “but in the waiting.”
Patrick Hosking is Financial Editor of The Times
