If this long-term investing is so good, how come we've had such a miserable decade, and what should we be expecting in the future? A return to form, that's what.
If you'd asked me back in 1999 to guess what I might be saying today when I looked back on the past ten years of stock market investing, I would have expected to be talking about a FTSE 100 that had risen nicely (if, perhaps, modestly) from the 6,000 mark that is was hovering around at the time, to maybe around 9,000.
But with the FTSE languishing under 4,000 today, I'd have been badly wrong.
Equity Gilt Study
I would have based my opinion on the Barclays Capital Equity Gilt Study, which is published every year and looks at the returns on various classes of assets, with comparisons of equities (shares), gilts and cash going back over the past 109 years. The study has shown that shares have been the best performing investment class over long periods, and the longer the period the better the outperformance.
In fact, the 2009 study, which was released recently, compared rolling periods of different lengths (with rolling five-year periods comprising overlapping periods like 1990-1994, 1991-1995, etc), covering a total period of 109 years.
It shows that, in rolling five-year periods over the 109 years, shares outperformed cash 74% of the time and gilts 75% of the time, while over rolling 10-year periods, shares beat cash 92% of the time and gilts 81% of the time.
And looking at rolling 18-year periods, the study discovered that shares beat cash a stunning 99% of the time.
There's no certainty
Of course, that means that shares performed less well than cash in 8% of those rolling ten-year periods, and in 1% of rolling 18-year periods, and we really must examine our confidence in that light. If shares are beaten by cash in 8% of ten-year periods, then over the course of our investment careers most of us should expect to experience such periods several times. And at the end of a bad ten-year period, we can't deduce that it was all wrong and that shares are no good after all.
Still, the ten-year period just gone by really was a stinker -- the study calls it a "lost decade" for shares, and tells us that it has been amongst the worst decades on record, with only the decades ending in 1937, 1938 and 1939 being worse.
The future?
There's no benefit in crying into our portfolios and bemoaning their wretched performance, so does the study bear any good tidings for us? Yes, it does.
Over the period of the Barclays study, there have been 16 ten-year periods similar to this one just past, in which total returns from shares have lost money in real terms (that is, after inflation). But in each of those cases, the stock market came back with a vengeance and delivered an average of nearly 11% per year for the next ten years.
Individual years
Looking at some individual years, after the post-crash horror years of 1929, 1930 and 1931 (-19%, -9%, and -24% respectively), the next five years saw UK equity prices rise by 28%, 21%, 10%, 10%, and 15%.
Then after four consecutive annual falls in the immediate pre-war years to 1940, the next six years saw an average annual rise of over 10%.
And if we look at the economic slump of the seventies, after falling 31% in 1973 and 55% in 1974, UK shares stormed back with a 136% rise in 1975, a slight fall of 4% in 1976, and then a staggeringly good 13-year run through to 1989 that averaged a whopping 18% per year in share prices alone (without dividends, which also did very well).
My next prediction?
If the past is anything to go by and the next decade rebounds the way decades have done over the 109 years of the Equity Gilt Study, by 2019 we should probably expect the FTSE 100 to be up around the 10,000 mark.
We do face some very serious economic challenges over the next few years, but I'll be seriously searching for comestible headgear if we're not heading for a cracking decade for shares.
In the words of the study, "Prospective returns from equities are at the most attractive levels seen for some 20 years in the US and over 25 years in Europe and the UK".
If shares do bounce back then you can make hay by using The Motley Fool's Share Dealing service. Real-time trades cost just £10 and it's free to open an account.
