History Matters – Lessons for Investors

Analysis shows investors underestimate volatility, overestimate the impact of economic growth and are poor at timing transactions.

History Matters

There’s little point trying to make investment decisions for the future if you don’t know what has worked in the past.

In recent weeks, two exhaustive publications – the 2014 Global Investment Returns Yearbook and Barclays’ Equity Gilt Study – have examined market returns over the past century yielding many valuable, but often confounding, insights.

Growth Puzzle

The yearbook is an annual update of the 2002 book Triumph of the Optimists, which popularised the “perverse” fact that economic growth is, peculiarly, negatively related to stock returns.

The latest yearbook returns to the growth puzzle, examining returns from 85 countries between 1972 and 2013. Result? Buying stocks in low-growth countries easily beat returns on offer in high-growth economies.

Past yearbooks have also found investors who bought equities in countries with weak currencies over the previous five years would have trounced those who bought into countries with strong currencies.

The most likely explanation is that strong GDP growth is already reflected in prices, investors bidding up asset prices and setting themselves up for sub-par long-term returns.

It’s not the case that future GDP growth is irrelevant to investors – if you were perfectly clairvoyant you would be in the money. The thing is, it’s very difficult to make predictions that are not already embedded in prices.

“Stock market fluctuations predict changes in GDP,” the yearbook concludes, “but movements in GDP do not predict stock market returns.”

Dividends Crucial

Dividends have accounted for 42 per cent of US market returns since the 1930s, accounting for at least 33 per cent of returns in every decade except the 1990s.

Dividends are particularly important in stagnant markets, accounting for 233 per cent of returns in the 1930s and 135 per cent from 2001-2010.

High-yielding shares tend to outperform, the 2011 yearbook notes – between 1900 and 2011, every £1 invested in high-yielding UK shares would have grown to £100,160 – almost 20 times the £5,122 returned from low-yielding shares.

This yield effect was found in 20 out of 21 countries studied, the average yield premium a “striking” 4.4 per cent per year.


Investors who spend their dividends are losing out. The latest Barclays Equity Gilt Study notes that £100 invested in UK equities in 1900 would, with dividends reinvested, are worth £28,386 in real terms today.

If you didn’t reinvest, however, your inflation-adjusted portfolio would be worth just £191.

Volatility is the Norm

Investors might be less prone to being spooked by market falls if they remembered that volatility is the norm not the exception.

Although the US market has returned an average of more than 9 per cent over the last 85 years, there have been only 14 years where the annual return was within the 0-10 per cent range during that period – just one year in six.

Returns can be lumpy: great one year, awful the next. Since 1871, markets have either risen or fallen by more than 20 per cent in more than 40 per cent of all years.

Since 1945 there have been 27 double-digit corrections and 12 bear markets (losses of at least 20 per cent).

Earlier this year headlines screamed that some $3 trillion (€2.18 trillion) had been wiped off global equities in a matter of weeks – a fall of 5.5 per cent. The S&P 500 has seen 19 pullbacks of more than 5 per cent since March 2009, since when the index has gained 170 per cent.

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Article published on Tuesday, 25th February 2014 by The Irish Times (Proinsias O’Mahony).

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