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Important Investing Lessons From 200+ Years of Asset Class Returns | The Mesh Report

Important Investing Lessons From 200+ Years of Asset Class Returns

Dividend Sensei June 4, 2021 Comments Off on Important Investing Lessons From 200+ Years of Asset Class Returns

By Ben Carlson

I’m a sucker for historical market data.

I know, I know. It doesn’t help you predict the future but it can help shape your expectations to allow you to emotionally prepare for a range of outcomes.

This week someone sent me this Long-Term Asset Return Study done by Jim Reid and the team at Deutsche Bank that looks at historical asset class returns going back to 1800.

You have to take any financial market data, call it pre-1950s or so, with a bucket of salt but I still think these numbers can be instructive when thinking about the very long-term for financial markets.

Reid’s research shows the historical real returns on stocks, bonds, cash, housing, and commodities over a number of different time frames:

There’s a lot going on here and this might be hard to read for those of you who don’t have better than 20/20 vision like yours truly (not to brag) so let’s zoom in on some of these numbers.

These are the annual real (after-inflation) returns for U.S. stocks, 10-year treasuries, cash, and commodities:

Some observations:

Short-term returns for the stock market can be highly unpredictable and unstable. Long-term returns for the stock market have been far more stable. While real returns have been elevated for the past 5 and 10 years, there isn’t much of a difference between returns over 15, 25, 50, 75, 100, 150, or 200 years.

This is comforting even if future returns are promised to no one.

It’s also a good reminder that the high returns in the current cycle won’t last forever. You can’t set your iPhone to it but eventually higher than average returns will be followed by lower than average returns.

Returns have been much higher than the long-term averages since 1980 but you can see the numbers since 1999 are working off some of those excesses.

Interest rates have been on the floor since the Great Financial Crisis but the numbers over the past 5, 10, and 15 years show how the safety of cash over the short run can hurt you over the long run.

Cash and short-term bonds can certainly be helpful when you need to spend your capital in the near term but if you hope to beat the rate of inflation over the long term you need to accept some risk in your portfolio.

Sitting in cash will always feel safer than investing in the stock market but the stock market gives you much higher odds of increasing your standard of living.

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