Wednesday 8 February 2012

10,676,500% Return!

LSE Performance 1900-2011 Source: Credit Suisse

A new study of market trends since 1900 demonstrates, once again, that over a lifetime or longer, equities have been the best investment.

The latest Credit Suisse Global Investment Returns Yearbook, put together by Elroy Dimson, Paul Marsh and Mike Staunton of the London Business School, looks at stock market trends in a range of countries since the beginning of the last century.

For the London Stock Market, over the last 112 years, the real value of equities, with income reinvested, grew by a factor of 291.1 as compared to 5.4 for bonds and 2.9 for government bills. Since 1900, equities beat bonds by 3.6% and bills by 4.2% per year and the long-term real return on UK equities was an annualised 5.2% as compared to bonds and bills, which gave a real return of 1.5% and 1.0% respectively.

As This Is Money puts it: "In simple cash terms, £1 put into the British stock market – and with dividends re-invested year in, year out – would now be worth £22,432. But over the same period, prices have increased 77-fold. In real terms, the same £1 investment – again, with dividends re-invested – is worth a more realistic £291."

The vast majority of the gain on equities comes from reinvesting dividends. If investors spent the dividends as they came in rather than putting them back into shares, the £1 stake from 1900 would now be worth just £1.80p after adjusting for inflation.

However, in the past two decades, bonds rather than equities have looked relatively attractive. In the Nineties, the total return on bonds was only just short of the return on equities. And in the first decade of the 21st century, bonds showed a real return of 2.4 per cent, whereas the return on equities did no more than keep pace with inflation: the return was zero.

But, coming back to the  10,676,500% Return! headline: as reported by This Is Money, (although I can't find this in the report itself) in the long-term, the total return from high-yielding shares – shares with a big dividend relative to their price – is hugely above low-yielding shares. In the 112 years since the beginning of the 20th century, a holding of high-yielding shares with dividends re-invested multiplied its value 106,765-fold. For low-yielding shares, the figure was 4,255.

I am not a financial advisor and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.

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