By: Dividend Sensei
By Ben Carlson
One of my favorite annual market updates comes from The Credit Suisse Global Investment Returns Yearbook by Elroy Dimson, Paul Marsh, and Mike Staunton.
Every year it provides valuable insights or useful reminders about the importance of a long-term mindset in the financial markets.
These reminders are more important than ever in a society that focuses more on the day-to-day or even minute-to-minute when it comes to the markets.
Here are four reminders from some of my favorite charts in this year’s update:
1. Stocks beat bonds over the long-term. Dimson, Marsh, and Staunton give an update of the real returns by country for stocks, bonds, and cash going back to 1900:
In all 25 countries studied, stocks beat bonds and cash and by a considerable margin in most cases. And bonds have outperformed cash in every country but one.1
The results aren’t equal across all countries. You can see some had negative real returns, which mostly came from war or hyperinflation in the first half of the 20th century.
But over the long-term, there is a clear relationship between risk and reward. Stocks are riskier than bonds or cash in the short-run so they have higher returns in the long-run.
2. The long-term doesn’t matter if you can’t survive the short-term. Obviously, no one has an investment time horizon of 120+ years.
The distribution of returns gives you a better sense of the range of performance over various time frames:
Even 10 years is relatively short-term in the grand scheme of things as you can see from the wide range of real returns over that time frame.2
This is why bonds and cash, while seemingly useless over the long-term, can be essential over the short-term.
This is true for both practical and emotional purposes.
The practical use of bonds and cash is having an asset that can be used to buy stocks when they’re down or avoid selling your stocks when they’re getting crushed.
And the emotional use of bonds and cash is having an asset that can dampen volatility, both in your portfolio and in your emotions.
Owning bonds can be a hedge against bad decisions at the worst possible time so you can make it to the long-term with your stocks.
3. Inflation plays a bigger role than you think.