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RP: Hello there. Every year, Credit Suisse publishes its Global Investment Returns Yearbook. It’s a remarkable, ongoing study, showing how stocks and bonds have performed in countries all over the world since 1900. What can we learn from very long-term market data like that? Here’s one of the report’s authors, Elroy Dimson.
ED: If you plot through the history, using the work that I’ve done with my London Business School colleagues Paul Marsh and Mike Staunton, where we’ve looked at the performance of individual stock markets, we’ve now got data for 23 different markets running from 1900, some of those markets prospered on the way in a direction that was largely going upwards and onwards although there were some setbacks.
There are counterexamples. So, for example, Russia: anyone who invested all their money in the Russian market lost it all in October 1917. China: the assets started to disappear around 1941 and by 1949 they’d gone completely.
Individual investors who invest in a single country are exposed more to these factors than if they invested internationally. So, the importance of diversification is clear within markets, but across markets, it’s also worthwhile, and it’s easier today than it was 100 years ago to invest internationally.
RP: Elroy Dimson and his colleagues wrote a well-known book about markets in the 20th century, "Triumph of the Optimists". Why, then, did they choose that title?
ED: We called it "Triumph of the Optimists" because our view was that back in 1900, only real optimists would have poured their money into industrial and commercial common stocks and that many risk-averse investors would’ve played safe with government securities. It was the optimists, the people who were not frightened, who performed very well.
We then came into the 21st century, and in the 21st century, we had two major setbacks: in 2001 approximately and in 2008. And so the early years of the 21st century have not been promising in the way the 20th century was.
RP: So, the lessons to learn. Stock markets, over the long term, have delivered healthy returns. But there were long periods when investors had to be patient. It also paid to be globally diversified.
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