What The Last 100 Years Can Tell Us About Our Long Term Returns

April 13, 2018

What The Last 100 Years Can Tell Us About Our Long Term Returns

At the beginning of this century, London Business School professors Elroy Dimson, Paul Marsh, and Mike Stauton wrote a seminal book on stock market investing titled Triumph of the Optimists where he described what has happened over the past 100 years.

Today, we’re going to go through his findings and through his updated findings that he publishes annually for Credit Suisse in order to see what we can expect from long term investing returns.

We all think the stock market is the best and only thing one should invest in, but is it really and were the last 100 years just the triumph of the optimists? Let’s find out.

Historical Risks & Returns

The main things investors worry about are their returns and their risks. What we want to know is, what will our return be and what is the probability that it won’t be positive over a certain period of time?

A look at long term returns over 16 countries will show us what has happened, and thus what can happen.

Figure 1: Stock market returns from 1900 to 2016. Source: CSInvesting.

The first striking fact is that 99% of stock market commentary uses returns from the U.S. market which is the top performing market alongside Australia and South Africa. However, the median return is 50% lower than the most famous U.S. return and real returns have been as low as 2% in some countries.

This tells me that such low long term returns can happen again. Let’s see what you can expect if your investment horizon is, let’s say, 20 years or more.

Figure 2: Long term stock market returns for the U.S. Source: CSInvesting.

So, in the worst case past scenario, real returns have been negative for 20 years in the U.S. That is definitely something to expect as a possibility. Unfortunately, I don’t think that most market participants even consider that real stock market levels could be lower in 20 years.

The professors smartly point out that the above sample is too small for statistical conclusions which further strengthens the thesis that we can expect anything from stocks.

If we take a look at long term stock market returns in Italy, the picture changes completely and isn’t that positive any longer.

Figure 3: Long term stock market returns for Italy. Source: CSInvesting.

In the worst case scenario, investors in Italy have had to wait for 70 years to get positive returns from the stock market which isn’t the horizon that you have in mind when investing.

What To Expect In The Future

The professors have made a model that shows what we can expect as investors from the stock market in the next 100 years based on a 5% real return. The data might disappoint you.

Figure 4: Long term return possibilities for stock portfolios. Source: CSInvesting.

If you hold stocks in only one country, you might wait 80 years for positive returns, while if you diversify across at least 8 countries, the worst case scenario will lead you to only wait 40 years for positive returns. The probability of a negative return over 40 years is still 6%. Do you consider that when thinking about retirement and other financial goals?


For me, the figures above are staggering and extremely important because this is the reality that no one talks about.

Their title Triumph of the Optimists doesn’t mean that the optimists have triumphed, but how the optimists see what they want to see and thanks to luck, have triumphed in the past 100 years in the U.S.

The repercussions on the financial system from 30 years of negative stock market returns would be unimaginable and that is the main reason why central banks around the world are doing whatever it takes to keep stocks and other asset prices as high as possible.

The main concern for long term returns are the current low interest rates. Low interest rates will simply lead to low long term returns. That is what has happened in the past as the lower the interest rate, the lower future returns are.

Figure 5: Returns and interest rates. Source: Credit Suisse.

Now, interest rates have been rising a bit lately, but that’s just thanks to inflation and, unfortunately, periods with high inflation haven’t been the best for stocks.

Figure 6: Stock market returns and inflation. Source: Credit Suisse.

The point is that the stock market has done great over the past 35 years, but nowhere does it say that the market will do the same over the next 35 years, and that’s something one should keep in mind.

The perspective, due to the low interest rates, are that stock market returns will be much lower in the future than what they’ve been in the past.

Figure 7: Long term forecasted returns will be much lower than past returns. Source: Credit Suisse.

Perhaps the biggest risk to the current financial perspective on investing is that thanks to positive past stock market performance, investors are in their buy high sell low mode and have completely turned to passive investing schemes.

Figure 8: The switch to passively managed investing is the real risk. Source: Credit Suisse.

As always, investors follow what has been the best thing in the past.

I firmly believe that due to the low interest rate environment, long term debt cycle, and financial engineering by central banks globally, one must look at investing and building one’s future through a much broader, diversified lens. This includes various investments, and different stock market investing techniques that will lead you to reach your financial goals no matter what happens.

Putting one’s hopes just in the stock market is, as historical data shows, stupid.