Long term in the extreme

INVESTORS are always told to have a long-term view of markets, and a new study sponsored by ABN AMRO takes that to a new extreme.

The study, by London Business School, examined returns from major international markets since 1900, and its findings challenge accepted wisdom in some areas.

It found that Australian shares have produced better returns than most other markets, including the UK and US.

The average return from Australian shares over the past 100 years has been 7.5 per cent per annum.

One dollar invested in Australian shares in 1900 would today be worth $91,082, or $1,487 after adjusting for inflation.

The study suggests that investors should expect a lower equity risk premium in future. It found that other studies have overestimated the performance of equities by focusing on recent periods, successful markets or biased indexes.

The study also found that consecutive periods of negative equity returns are not uncommon. In fact, two consecutive years of negative equity returns have occurred on average in 16 per cent of all two-year periods.

Three consecutive years of negative returns are less common, having occurred 6 per cent of the time since 1900

The big fall in global equity markets over the past two years was described as historically high. The only post-War period with lower returns was the bear market of 1973-74, when US equities fell by half and UK equities by two-thirds.

The authors dispute the view that, over all 20-year periods, equities will outperform bonds. Though this was the case for the US and UK, there have been much longer intervals (40 years or more) in other countries during which the equity risk premium was negative.

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