Stocks Are Good Investments – As A Group

Elroy Dimson, Paul Marsh, and Mike Staunton published a book in 2002 called Triumph of the Optimists. They went through 101 years of stock data from 1900 to 2001 and came up with possibly the most comprehensive research over a long time frame.

The book covers the USA, UK, Japan, France, Germany, Canada, Italy, Spain, Switzerland, Australia, the Netherlands, Sweden, Belgium, Ireland, Denmark, and South Africa.

In the book, the authors measured the return for shares and bonds. The following figure shows the returns in stocks adjusted for inflation from 1900 to 2001 (bond returns further down):

The data clearly shows that shareholders are paid for taking a greater degree of risk over time.

This doesn’t mean that you shouldn’t have any assets other than shares. However, the majority of your savings should be mostly in shares. Your investment in shares helps you participate in value creation that takes place in the private sector and should provide an inflation hedge over time.

An index consisting of all these countries would give an annual real return of 5.8% per year. For the US, the return was much better at 6.7%. While an annual return of 5.8% may seem small to many, you must remember that this is adjusted for inflation.

If the nominal return is 12% per year and inflation is 4%, this means that the real return is 8%. The graph clearly shows that it is a good idea to save in shares if you want to work harder until retirement age.

It is worth knowing that not all countries have given equal returns. The return varies somewhat from country to country (these figures are also adjusted for inflation):

The following chart shows that the return varies greatly from country to country.

History also shows that the US stock market has given better returns in the last half of the time period:

It is clear from the above chart that the second half of the last century was better than the first half.

Hence, data shows that stocks have performed exceptionally well over the years and they tend to deliver better results than most asset classes.