The following might be of interest to those interested in the property versus shares (long term hold) debate.
"Revealed: the great stock market swindle
Periodic catastrophic declines that destroy years of accumulated profits are the norm, not the exception, writes David Schwartz
Sunday July 13, 2003
The Observer
Many experts claim investing in the stock market is the best way to save for the long run. Like many other claims made by financial commentators, it is difficult to prove or disprove this one because of the lack of objective data.
I recently created a two-century long inflation-adjusted UK stock market index to resolve this critically important issue.* Among the mass of information produced by this index, one fact emerged head and shoulders above all others. Investing in the stock market is not as profitable as the experts would have us believe.
During the 1800s, the UK stock market grew at a miserly average annual rate of 0.6 per cent after factoring out the effects of inflation. By recent standards, investment profits of this magnitude were pretty dismal.
Why was the stock market so disappointing in the 1800s? It is partly down to business and investment fashions of the times. Investing was a risky undertaking. Institutional investors as we know them today did not exist. Wealthy private investors were the dominant force. They often coughed up money for speculative railroads, canals and other infra structure investments, both here and abroad.
Despite the risks, periodic bouts of speculative fever drove shares to excessively high levels. There were also periodic drops when many companies went bust and investors lost heavily, especially those who acquired shares late in a speculative cycle. Sounds familiar, doesn't it?
In many respects, the twentieth century was a different investment era. Investing in shares became a widespread practice. Many companies from different industries offered their shares to the public. Vast quantities of information became available to help private investors make more informed choices. But as far as investment profitability was concerned, the new century made little difference.
Shares rose at a real average annual rate of just 0.2 per cent during the first three-quarters of the century, even worse than the previous century's trend. During the euphoria of the 1990s, some commentators claimed that twentieth-century stock market statistics were misleading because of major drops in 1928-32 and 1972-74. According to them, one should ignore these two oddball sell-offs for a truer picture of stock market profitability.
The bear market of 2000-2003 eroded support for this theory. In fact, if you take a step back and look at the big picture, the recent downturn reminds us of the existence of a remarkably consistent long-term trend. The simple truth is that stock market prices do not rise all that much over the very long term. Periodic catastrophic declines that destroy years of accumulated profits are the norm, not the exception.
When viewed from this perspective it becomes clear that the 10 per cent annual average gain of the 1990s (not counting dividends) was a temporary aberration.
The historical record helps to demolish a second argument as well. When confronted with the painful truth that shares are not all that profitable over the long run, stock market fans quickly demand that you name another investment category that produces better returns over the long term.
Their claim of relative superiority is absolutely true if you plan to invest for the very long term, say 100 or 200 years. But for those of us not blessed with the necessary genes and good fortune, the 'better than other options' argument is also worth ignoring.
History teaches that virtually every major multi-year advance during the last two centuries ended with a lengthy period of under-performance.
There were 25 occasions when shares rose steeply in a 15-year cycle. They did not rise in every one of those years but their cumulative gain over the full 15-year period was well above average. In 24 of those 25 cycles, prices fell in the next 15 years.
We had a very sharp gain in the 15-year run-up to the new century. The Footsie ended 1999 at 6930. If history repeats itself, the stock market will be lower at the end of 2014, after factoring out the effects of inflation.
Some investors may be thinking that we have already suffered a huge three-year drop and that the future to 2014 looks a bit more positive than the 15-year rule would have us believe.
Perhaps. But before you allow this line of reasoning to sway you, recall that the stock market rose explosively throughout the 1980s and 1990s. Shares more than doubled in the 15 years from 1981 to 1996. The FTSE-100 reached 4119 as 1996 came to an end, near to current levels. If history is any guide, danger still lies ahead, despite recent falls. The 15-year reversal rule hints that shares will be sitting below 1996's closing price at the end of 2011, after factoring out the effects of inflation.
Short-term investors should feel free to ignore this pessimistic view. Prospects for the immediate future look rosy. Shares are likely to continue to rise, building upon the rally of the last three months. But history warns that short-term investors will be the only ones to gain. Those with a long-term horizon who are investing for retirement would be best served by investing in a building society savings account.
*The well-known Barclays Capital Equity Gilt study was the source for twentieth-century data. Nobel prize winner Fredrich Hayek's research provided nineteenth-century inputs. Thanks also go to Professor Emeritus Charles Feinstein of the University of Oxford for his authoritative research on nineteenth-century cost-of-living changes."
http://observer.guardian.co.uk/business/story/0,6903,997034,00.html
"Revealed: the great stock market swindle
Periodic catastrophic declines that destroy years of accumulated profits are the norm, not the exception, writes David Schwartz
Sunday July 13, 2003
The Observer
Many experts claim investing in the stock market is the best way to save for the long run. Like many other claims made by financial commentators, it is difficult to prove or disprove this one because of the lack of objective data.
I recently created a two-century long inflation-adjusted UK stock market index to resolve this critically important issue.* Among the mass of information produced by this index, one fact emerged head and shoulders above all others. Investing in the stock market is not as profitable as the experts would have us believe.
During the 1800s, the UK stock market grew at a miserly average annual rate of 0.6 per cent after factoring out the effects of inflation. By recent standards, investment profits of this magnitude were pretty dismal.
Why was the stock market so disappointing in the 1800s? It is partly down to business and investment fashions of the times. Investing was a risky undertaking. Institutional investors as we know them today did not exist. Wealthy private investors were the dominant force. They often coughed up money for speculative railroads, canals and other infra structure investments, both here and abroad.
Despite the risks, periodic bouts of speculative fever drove shares to excessively high levels. There were also periodic drops when many companies went bust and investors lost heavily, especially those who acquired shares late in a speculative cycle. Sounds familiar, doesn't it?
In many respects, the twentieth century was a different investment era. Investing in shares became a widespread practice. Many companies from different industries offered their shares to the public. Vast quantities of information became available to help private investors make more informed choices. But as far as investment profitability was concerned, the new century made little difference.
Shares rose at a real average annual rate of just 0.2 per cent during the first three-quarters of the century, even worse than the previous century's trend. During the euphoria of the 1990s, some commentators claimed that twentieth-century stock market statistics were misleading because of major drops in 1928-32 and 1972-74. According to them, one should ignore these two oddball sell-offs for a truer picture of stock market profitability.
The bear market of 2000-2003 eroded support for this theory. In fact, if you take a step back and look at the big picture, the recent downturn reminds us of the existence of a remarkably consistent long-term trend. The simple truth is that stock market prices do not rise all that much over the very long term. Periodic catastrophic declines that destroy years of accumulated profits are the norm, not the exception.
When viewed from this perspective it becomes clear that the 10 per cent annual average gain of the 1990s (not counting dividends) was a temporary aberration.
The historical record helps to demolish a second argument as well. When confronted with the painful truth that shares are not all that profitable over the long run, stock market fans quickly demand that you name another investment category that produces better returns over the long term.
Their claim of relative superiority is absolutely true if you plan to invest for the very long term, say 100 or 200 years. But for those of us not blessed with the necessary genes and good fortune, the 'better than other options' argument is also worth ignoring.
History teaches that virtually every major multi-year advance during the last two centuries ended with a lengthy period of under-performance.
There were 25 occasions when shares rose steeply in a 15-year cycle. They did not rise in every one of those years but their cumulative gain over the full 15-year period was well above average. In 24 of those 25 cycles, prices fell in the next 15 years.
We had a very sharp gain in the 15-year run-up to the new century. The Footsie ended 1999 at 6930. If history repeats itself, the stock market will be lower at the end of 2014, after factoring out the effects of inflation.
Some investors may be thinking that we have already suffered a huge three-year drop and that the future to 2014 looks a bit more positive than the 15-year rule would have us believe.
Perhaps. But before you allow this line of reasoning to sway you, recall that the stock market rose explosively throughout the 1980s and 1990s. Shares more than doubled in the 15 years from 1981 to 1996. The FTSE-100 reached 4119 as 1996 came to an end, near to current levels. If history is any guide, danger still lies ahead, despite recent falls. The 15-year reversal rule hints that shares will be sitting below 1996's closing price at the end of 2011, after factoring out the effects of inflation.
Short-term investors should feel free to ignore this pessimistic view. Prospects for the immediate future look rosy. Shares are likely to continue to rise, building upon the rally of the last three months. But history warns that short-term investors will be the only ones to gain. Those with a long-term horizon who are investing for retirement would be best served by investing in a building society savings account.
*The well-known Barclays Capital Equity Gilt study was the source for twentieth-century data. Nobel prize winner Fredrich Hayek's research provided nineteenth-century inputs. Thanks also go to Professor Emeritus Charles Feinstein of the University of Oxford for his authoritative research on nineteenth-century cost-of-living changes."
http://observer.guardian.co.uk/business/story/0,6903,997034,00.html
