Nothing beats equities; a hundred years of history proves it
It’s the question that is being asked with greater urgency as markets become more volatile, political shenanigans loom large and interest rates are on the move: what is likely to be the best investment strategy in these circumstances?
The answer is that only fools are certain of what do at any given time and that certainty mutates into something even more foolish when accompanied by a refusal to learn anything from history.
That’s why many investors look forward to the annual publication of the Credit Suisse Global Investment Returns Yearbook, which provides a century-long look at 23 national markets, accompanied with a depth of historical data making sense of short-term trends.
The 2018 edition, published last month, confirms what many value investors have long believed, namely that, by and large, there is no better long-term investment than equities. Since 1900 no other investment class has consistently outperformed. In this period US equities yielded an average 6.5 per cent annual return in real terms.
An interesting aside here is that in both the US and British markets the best performers in the period from 1926 to 2017 were stocks with the smallest capitalisation. Larger caps ranked the worst.
This longer-term picture raises some interesting questions for devotees of exchange trade funds, which, as index trackers, are invested in large caps, even though in more recent times these big companies have offered better returns.
What is surprising, particularly for Hong Kong’s property-obsessed investors, is that in a basket of 11 countries, property came out as a pretty miserable investment, yielding an average annual real return of just 1.3 per cent in the years 1900 to 2017. By far the weakest of the markets in this basket was the United States, producing an annual return of just 0.3 per cent, while Australia stood out with an average 2.2 per cent return. It is important to note that this study purely examined property as an investment class. That means that in calculating real returns, the costs of owning property loomed very large.
But, of course, property ownership is not and cannot be purely a matter of investment. Indeed the big picture suggests that although property returns can be less exciting than they are generally imagined to be, when the opportunity to buy arises and the costs of paying rent (money down the drain) are factored in, the case for acquiring a property for homeownership purposes is compelling – even to the extent of abandoning other investment options. Lamentably, in Hong Kong the opportunity to buy remains illusive for average wage earners.
Interestingly, the only asset class that came close to matching the performance of equities was collectables. The star performer here was classic cars, even though in the past year the ever-rising price of vintage vehicles slammed into reverse. Wine came in second in this category, followed by art. The obvious advantage of these so called passion investments is that besides gaining in value they offer the possibility of immense enjoyment along the way, something that cannot be said of most other asset classes.
Gold, the fanatical investment of choice for a band of people ranging from conspiracy theorists to those who only believe in investments they can touch and see, has, overtime, proved to be a lousy punt, yielding a mere 0.7 per cent average annual return over a century or so.
Bonds remain the investment of choice for risk-averse punters, who know full well that they are never going to scale the dizzy heights of equity investments but value the benefit of steady accumulation over excitement. Last year was more than kind to bond investors but overall the low risk, low reward equation for bonds remains. In the US, market bonds registered an average return of just 2 per cent per year, in the 1900 to 2017 period, less than a third of that achieved by equities.
Although it is hard to argue with history, investors are often attracted by the idea that the safest portfolio is one containing a mixture of asset classes.
This seems to make sense and there is some psychological comfort to be gained from the idea of balance. The problem is that balance has its limitations particularly when it involves the purchase of funds carrying high management fees, making the costs of balance unacceptable. Therefore surely it makes sense to keep portfolios simple.
So, there is an unambiguous message for those who see history as a guide to investment – nothing beats equities. This produces the obvious conclusion that when equity prices plunge, it is almost willfully negligent not to buy shares. However, in current circumstances, there is a need to restrain the itch to act while uncertainty prevails.
Stephen Vines runs companies in the food sector and moonlights as a journalist and a broadcaster