- For investors seeking returns in a low-interest environment, equities have been attractive in relative terms.
- This is unlikey to change in the coming decade, according to DWS’s latest long-term study.
- Although equity returns are likely to be somewhat more moderate than previously, they should remain well above bond levels.
"If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes." These are the words of Warren Buffet, one of the greatest investment legends of our time and – according to the business magazine Forbes – the third richest person in the world. But are there any hard figures to show that a ten-year investment horizon pays off in equities? The answer is yes.
Equity risk pays off in the long term
Investors in the S&P 500 US stock-market index over the past decade had a total annual return of 13.6 percent to look forward to. Even those who bought and held emerging-market equities managed to earn almost half that over the same period.
Equities still look more attractive than bonds
So much for past figures. What are equity returns expected to be in the next ten years? DWS addressed this question in a recent study. According to the results of the "Long View", long-term equity exposure should remain worthwhile in future. This despite high valuations, mixed economic prospects and significant price drops, which investors are unlikely to escape. For equity investments in almost all regions, investors should be able to expect growth of at least four percent per year over the next decade. This is considerably more than may be expected from fixed-income investments, where most segments do not even cross the three percent mark. At present, emerging markets seem to offer the most promising outlook for equities. Among the industrialised nations, the US will probably continue to offer the greatest return potential for equities.
In the equity sector, emerging markets and the US offer investors the highest return opportunities.
But how can DWS quantify expected returns for the next ten years? Of course, DWS experts cannot forecast with one hundred percent certainty what will occur, as conditions are always changing. However, by coupling long records on asset class performance with various influencing factors, they can make estimates that offer investors very good guidance.
Historical studies show, for example, that returns repeatedly revert to their average over long periods of time. If you use this knowledge to analyse the long-term relationship between returns and other economic variables such as economic growth and inflation, you can infer trends.
For example, DWS has found that since 1871 US equities’ total annual return has on average been 3.6 percentage points above US GDP. This ratio does not guarantee additional returns in future, but it does provide a concrete indication of how US equities react to this variable over time. It is then possible to extrapolate from that.
The return on US equities exceeds US GDP
Measured against the real economic performance of US companies, return on investment to shareholders was on average 3.6 percent higher per year.
The assumptions underlying the long view are reviewed and adjusted once a year. Compared to last year, DWS's equity return forecast is more moderate this year, because of weaker global economic growth. Strong performance on some stock markets in 2019 also depressed expected returns. Valuations on these stocks are now comparatively high.
The bottom line is that a return outlook of at least four percent per annum in most regions means equities still look comparatively attractive in the current low-interest environment.
And there is one piece of good news in these turbulent times when investors sometimes sustain heavy interim losses on stock markets: the Long View shows that timing is a subsidiary concern when investing for the long term, as return differences largely flatten out over time. This means that investors wishing to take advantage of the opportunities that the stock market offers don’t need to worry too much about when to enter the market. However, in line with Warren Buffet’s advice, they should be prepared to hold their shares for at least ten years.
For investors with a long-term investment horizon, the question of when to enter the market is subsidiary.
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