The Case for Investing in Stocks – Long Term Evidence

Equity investors have been rewarded

Analysing long term returns of different financial assets it becomes clear that stocks have outperformed bonds and cash. Furthermore, the consistency of outperformance increases with the length of the investment horizon. Despite periods of volatility endured, long term stock investors have been rewarded for their patience with the equity premium, the extra return earned by investing in a profit-generating enterprise rather than simply holding cash. Numerous academic studies have estimated the historical outperformance of US stocks over cash close to 6% annually.

US stock returns vs. cash

Author	Period	Stocks > Cash
Siegel, Jeremy	1926-2004	6.1%
Damodaran, Aswath	1927-2017	6.1%
Ibbotson, Roger	1926-2010	6.3%
Bernstein, William	1900-2000	6.0%
Malkiel, Burton	1926-2009	6.1%
Dimson et al.	1900-2015	5.6%

Supposing an investment of $100 was made in 1927, by 2018 this would have grown to:

$142 if invested in T-bills (Cash) at 0.4% per year

$503 invested in 10 year bonds at 1.8%

$26,363 invested in the S&P 500 at 6.3%

….in real terms i.e. adjusted for inflation!

The highest returns are in market-friendly countries

                Stock>Cash

Sweden 7.4%

Finland 6.6%

Netherlands 5.8%

Switzerland 5.5%

Europe 5.3%

France 5.3%

UK 5.1%

Ireland 4.9%

Denmark 4.8%

Norway 4.8%

Germany 4.2%

Belgium 3.9%

Spain 3.7%

Portugal 3.5%

Austria 1.9%

Italy 1.2%

Greece* 0.8%

A long time horizon pays off

 Longer holding periods reduce risk significantly by allowing fundamentals to develop, whereas short term investing is affected by market sentiment and noise. Stocks have outperformed bonds on 67% of all two year holding periods, with the success rate rising to 80% over ten years and 96% for a 20 year timeframe.

Stock returns by length of holding period
Holding Period (Years)	Positive return	Better than cash	Better than bonds
1	73%	68%	66%
2	82%	73%	67%
5	87%	76%	71%
10	94%	84%	80%
15	99%	93%	87%
20	100%	100%	96%

Stocks: S&P 500, Bonds: Barclays US Aggregate; total return indices 1927-2017. 

Source: Bloomberg

While the owner of a privately held business may only seek to value their enterprise upon its sale, shareholders of listed companies are confronted by daily changes in the market price of their holdings. However as short and medium term fluctuations even out over time, stock returns revert to the mean, reflecting the fundamental growth of corporate earnings.

Consistency pays

So what does this mean in practice? Investing in stocks has been a winning strategy historically, and is likely to continue so in the future. However, shorter and intermediate term fluctuations in market prices often lead to impulsive decisions that can be damaging. Therefore an investor’s portfolio allocation to equities must be such they will have the fortitude to stay the course, and execute their strategy during falling markets.

Changing your strategy at the wrong time may be the single most devastating mistake you can make as an investor. A professionally managed portfolio, suited to your actual risk tolerance, can help you avoid this danger and benefit from the long term appreciation of stocks.