For a couple of reasons, the recent publication of the Credit Suisse Global Investment Returns Yearbook had me thinking about my kids. The first is personal. The report’s launch was hosted as usual by the bank’s research director who I first met after the birth of our daughters nearly 30 years ago. That’s only around a quarter of the 123 years now covered by this unmatched guide to the financial markets, but it’s long enough to have seen a few ups and downs and for both of us to have gained a few grey hairs.
The second reason is that one of the report’s focuses this year is on what we might expect from financial markets in the future. When your children reach their twenties and pick up the work and investment baton from you, it is natural to wonder how their experience of the markets will compare with your own. And seeing the markets through their fresh eyes puts those past three decades into perspective.
One of the key themes of the report is the importance of taking a long-term view. After a year in which bonds and shares delivered extremely poor returns it’s all the more important to see the recent volatility in context. The long run rewards for embracing the risks of investment have been spectacular, but there have been long periods when it has not felt that way.
Just US$1 invested in the US stock market at the dawn of the 20th century would have grown to be worth over US$70,000 by the end of last year. Even after an adjustment for inflation (which is the only meaningful way to look at investment returns) that dollar would have grown to be worth US$2,000. But after the Wall Street crash in 1929, shares lost 79pc of their value in real terms by 1932 and it was not until 1945 that they had regained their previous high.
In the UK, we have experienced our own more recent wilderness years since the bursting of the dot.com bubble in 2000. As recently as last October, the FTSE 100 was trading below its peak level on New Year’s Eve 1999.
A long-term perspective is not just important for an understanding of the equity market. In bonds too, even 40 years can be an aberration. Between 1982 and 2021, bonds delivered an annualised return of around 6pc, not far behind shares, but this was an exceptional golden age fuelled by victory over inflation and the beneficial impact of globalisation. In the previous 80 years from 1900 bonds lost money for investors in real terms. Last year, they did so again, dramatically, falling by more than 30pc after accounting for inflation.
So, when my children complain that we have had it easy, I’d counter that it’s not quite so black and white. Yes, we enjoyed the equity market’s golden period in the 1980s and 1990s (and as for housing, well that’s another story). But the first two decades of the 21st century have been more of a challenge. Two bear markets in which shares have halved, a global financial crisis and a pandemic gave us something to think about along the way.
What does the future hold for the next generation of investors just starting out today?
According to the yearbook’s authors, Professors Paul Marsh and Elroy Dimson and Dr Mike Staunton, they should probably expect slightly lower returns than their parents enjoyed and significantly less than their grandparents did starting out in the 1950s and 1960s.
The difference between the 6.7pc inflation-adjusted return from shares since 1950 and the 4pc predicted from here may not sound enormous but compounded up over a lifetime of investing, it will make a big difference. The gap between the 2.9pc delivered by bonds over that period and the 1.5pc that’s expected going forward will be even more significant.
The fact is that the stars were aligned in the second half of the 20th century as far as investors were concerned. Just as the first half of that turbulent century was far more catastrophic than anyone might have predicted in 1900, the second 50 years were far better than would have seemed possible as our young parents picked through the wreckage of two world wars and a Depression.
Some of the exceptional returns in that period were simply compensation for taking on the risk of investing in businesses that can and sometimes do go bust or simply disappoint. But others were one-off non-repeatable gains such as the relentless drop in interest rates over four decades and the progressive upward re-rating of share valuations over time.
Perhaps the most important takeaway from the report’s forward projections is the importance of dividends to the total returns that investors should expect from the stock market. In the short run, everyone focuses on capital gains or losses. Over a year or two they are likely to be the main driver of performance. But in the long run it is the re-investment of dividends that makes all the difference. One of the key reasons to expect poorer returns in the future is that dividend yields are lower today, with the exception of the out of favour UK market.
Thinking about my kids’ investing futures in the context of this subdued forecast, I’m reminded of the serenity prayer: accept what you can’t change and focus courageously on what you can. So, that the future turns out a bit better than they fear. And if it doesn’t, then at least the Millennials and Gen Z-ers in my family are doing the right thing: starting earlier than I did, saving what they can, taking sensible risks, diversifying away their mistakes and sticking at it.
Tom Stevenson is an investment director at Fidelity International. The views are his own.
