Shares: The Stock Market Profit Makers

5 April 2018  |  Dr. Ella Rabener
Shares- The Stock Market Profit Makers
It is no secret that shares generate more profit in the long term than bonds.
But a recent study shows just how wide the returns gap has been for over 100 years - and where the stock markets have grown the most.

Stocks are still somewhat of a mystery for the majority of the UK population. A 2016 report by the Department for Business Innovations & Skills found 20% of adults in the UK held shares 1. This demonstrates that most people in Britain still don’t understand what a strong profit maker shares can be in the long term. This graphic reveals just how strong:

Stocks - Winning Globally

Average annual returns in real terms from 1900 to 2017 (in %)

Average annual returns in real terms from 1900 to 2017 (in %)

Past performance or future projections are not indicative of future performance.
Source: Elroy Dimson, Paul Marsh, Mike Staunton: “Triumph of the Optimists”; Credit Suisse

Here you can see the average annual return on shares, bonds and cash in various countries and regions since 1900 - in real terms, i.e. after deduction of inflation. What is immediately obvious is that equities everywhere achieved a positive return. And everywhere they have been a more lucrative investment than bonds. Global equity portfolios have grown by an average of 5.2 percent per year - despite two world wars, the global economic crisis in the 1930s and the 2008 financial crisis. This was determined by scientists from the London Business School in cooperation with Credit Suisse.

It should be noted that equities carry a higher risk than bonds. In the dark stock market years between 1929 and 1931, for example, the global equity portfolio suffered a loss of 54 percent. And in 2008 it had the highest annual loss of 41 percent. But from 1949 to 1959 - in its strongest phase - it increased by almost 400 percent. And in the 1980s it recorded a profit of more than 250 percent. For investors, this means that they need to withstand fluctuations on the stock exchanges and remain invested. The longer someone remains invested, the less likely it is that they will ultimately have to accept a loss.

The graph also demonstrates why global diversification is so important. If you look at European countries such as Austria or Germany, you will notice they fall short of other countries when it comes to their yield. An important reason for this are the two world wars and the hyperinflation of the 1920s, which left particularly deep scars on the financial markets of these countries. Bonds and cash even recorded a real loss from 1900 to the present day. Stock markets also performed relatively poorly, with average real returns of between around 1.0 and 3.5 percent per year. This shows that focusing on one region or country when investing is not a smart investment, but a risky bet - even over such a long period of time.

This article is a translation of Gewinnmaschine Aktienmarkt.


Image: Unsplash/Lucas Favre

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Dr. Ella Rabener
Ella combines finance expertise, completing a doctoral degree in business and advising leading financial institutions while working with McKinsey & Company, with several years of experience building e-commerce startups, most recently as founder and CEO of