The sixty year bull market
Posted on June 6, 2007 by Richard Beddard
Filed Under Markets, Reading list |
It shows the value of £100 indexed from 1945.
- Invested in equities with dividends reinvested it would have been worth £125,243 by 2006.
- Investing in equities without reinvesting dividends would have reduced the payout to £8,342.
- Investing in gilts would have reduced the payout to less than half the initial sum; £49!
Wiser investors than I buy gilts (see Peter Temple’s income portfolio, for example). Maybe they can time the market. In the 1930’s there was a period when gilts did better than equities. The same happened again in the 1970’s, between 2000 and 2003, and in odd years scattered throughout the twentieth century.
I once hesitatingly suggested that, for ordinary investors like me, certainly those trying to accumulate assets, it isn’t worth paying attention to gilts. The years they do better go by too quickly, and, just because stocks in general go down during a bear market, it doesn’t mean your stocks will.
I was nervous about that statement. Frankly, I don’t know much about gilts and consequently investing in them sounds exotic, and brainy. I felt less vulnerable, though, after these two comments…
The first from John Mulligan a former investment banker who writes for Interactive Investor and runs an investment newsletter with an enviable record:
As a firm proponent of equities I would like to see personal pensions investing substantially in equities, both national and international, as well as other asset classes, thus helping overall economic development rather than helping governments out of financial holes as with gilt issues.
And the second from John Chatfeild-Roberts, a star fund manager:
I completely agree. Government bonds have almost always been a means of transferring wealth from individuals to the state, through the action of inflation. Look at the holders of War Loan. There is a brilliant table on page 248 of John Littlewood’s book “The Stock Market”*1, which shows that the real capital loss on War Loan between 1945 and 1979 was minus 95.6%! How much worse can you get? Why would anyone buy a gilt unless they thought that capitalism was dying and serious deflation was in prospect?
The original reason I posted the chart was not to slag-off gilts, but to offer a long term-perspective on the stock market. I wanted to make a statement about the durability of capitalism because as investors we sometimes have a tendency to wallow in doom, judging at least by some of the comments on the markets posts in this blog.
But every time I look at the chart, I see something different and I suspect perhaps you will too. Make of it what you will 
Footnotes:
- It’s an investment classic I should have added to the reading list a long time ago!
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16 Responses to “The sixty year bull market”
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I guess going back to 1945 seems like it would be an indication of the durability of capitalism, but I lack this kind of faith. Lets visit this again in 30 years…
The rear view mirror certainly casts things in a rosy light.
Looking at the potential impact of climate change (read 6 degrees - Mark Lynas), I am much more concerned about the next 30 years.
Hi Richard,
I have to say I would be happy to own a fixed income fund during a bear market, if this was the best investment at the time.
They are much better than the banks (as you can see from your chart).
If you are not in retirement or nearing retirement, then I would agree it would be pointless to own any fixed income vehicle in the current bull market.
One thing I have learnt over the last two months is that it is a bad mistake to own low ‘risk’, fixed income assets, simply to reduce overall volatility.
All this does is drag down the overall performance of your portfolio (my own portfolio has lagged the general market by about 2 to 3%)
It is much better to own good quality, high volatility assets which are reasonably diversified and uncorrelated.
As you know, I am currently in the process of switching out all these low risk assets from my own portfolio.
I constantly read about needing to be invested in fixed income vehicles in, or nearing retirement. I retired at 58, and hope to live until I an at least 85. That is a very long period in investment terms, so I am pleased to have all my savings in equity-based funds, earning sufficient to drawdown a very healthy income every month. OK, there are periods when I have drawn-down to deplete my original capital, but this is always made-up in later months when I go into surplus again. Long live capitalism!
Hi folks,
Deborah, it’s a date
By then I hope to be investing like A_Retired_Investor, although perhaps for a bit longer!
Aconite, I share your concern about climate change (and about the next 30 years). Sadly we can be less definite about it though…
Robin, put like that it’s difficult to argue with you. In regurgitating my old thoughts on gilts I forgot this quote, relating to a table of investment returns since 1900. It’s from the Sarasin Chiswell Investment Handbook (Feb 2007), a fascinating publication.
NB. These are total returns (i.e. include reinvested income). So my apathy towards gilts stems from two observations. The average return is barely better than cash, and I’ve had success in investing in stocks through a bear market. However, as I’ve explained elsewhere, I’m not really a market timer. If you could time your switches between equities and gilts, you could presumably do better.
Here’s a link to the handbook, which I highly recommend. I’m not sure it will work because I had to page through some disclaimers to get there, but if it doesn’t, just search for ‘investment handbook’ using the search box on the site and you can follow the same path I did to it:
Sarasin Chiswell Investment Handbook
Instinctively I agree with your observation about holding fixed income v un- or loosely correlated but more volatile assets, probably because I have decades to go before retirement and am fairly risk tolerant. Peter Temple ploughs a different furrow on the Interactive Investor mother ship. Next Tuesday we are publishing an update to his fund portfolio which I think you will find particularly interesting because it addresses this issue directly. It should appear here but let me know if you can’t find it and I’ll send or post the link.
Haven’t you read “fooled By Randomness’ …. Looking into the past, especially 1945, what sort of indication is that ?
[Message edited for relevance. I deleted a bit of a rant about an advertisement on the main Interactive Investor website, which I'd really rather not get distracted by on this blog. If you have a comment about the main Interactive Investor site, here's where you can lodge it - ed.]
I haven’t read “Fooled by Randomness” or “The Black Swan” although I’m beginning to think I should, as many people who leave comments have.
I, lake many of the investors I admire, believe you can learn from the past. Blame it on a misspent education - I’m a history graduate!
Hi Richard,
I found your article very interesting. One point that has perhaps been overlooked though here is the value of £100 in 1945. This was a really serious amount of cash in those days - my mother as a nurse earned less than that in a whole year! This gives a different perspective on what looks like a fortune derived from a small sum in today’s terms. Obviously from these figures, the return on equities was a better investment choice and I’m not attempting to deny that.
Another point of interest is that it all depends on what your investment goals are - whether income, growth or both as to which vehicles for investment are suitable for your needs and these will change over time - such as at retirement, as you pointed out. One of the rules of thumb in investing is that the higher the risk the more return you can expect to receive and conversely, the lower the risk, the lower the rate of return. Personally, before retirement I will probably invest in some gilts or other guaranteed income vehicle but my exposure will be minimal and used to help smooth out the ‘bumps’ in my other investments, to assist with my everyday bills. I however don’t expect to gain much with these other than to be able to sleep at night!
I suppose, as with everything else, you pay your money and you take your choice!
Hi Kathy, very nice to hear from you.
Regarding the value of £100 now, you might be interested in a blog post by Deborah (who wrote the first reply to this post). The common perspective is that although money ‘aint worth what it used to be we’re still better off than our parents and grandparents were because we earn so much more of it. Not so in Canada, she says.
Of course, on the basis that inflation erodes away most of the returns on gilts or cash, I’d say that only bolsters the argument for equities.
You’ve put the case for a degree of switching into gilts as retirement approaches very well, and one of the problems I admit I have is in visualising what I will do then (I’m 41). My best guess is I won’t retire fully but just slow-down a bit. And I’ll still be playing the game that all ‘entrepreneurial’ investors play - trying to get more return for less risk by selecting my stocks very carefully.
So even though I may need to take some ‘income’ from my portfolio I hope to take a leaf out of A_Retired_Investor’s book above and take it from high yielding stocks or by selling ‘capital gains’ - i.e. shares bought from my investment profits rather than switching to gilts.
It’s important to be able to sleep at night so the key is to know thyself, and try and do the best you can. It sounds like you have it sussed
An interesting chart. However, the thing it doesn’t show which would be very interesting
is property prices over the same period.
Everyone keeps going on about the latest boom
and how people can fund their retirement by buying a buy to let.
They forget in the 90s that it took ten years for prices to get back to where they were 1989 (I speak from experience on that).
Have equities outperformed property in the long term? I’d love to know.
I have not read ‘Fooled By Randomness’ but I have read ‘The Black Swan’ (or ‘The Ugly Ducking’ as I prefer to think of it).
I would not recommend it, as it is a really badly written book. However if anyone wants to tackle it I would suggest starting at chapter 15 as I suspect this is why people keep quoting this book on this website.
This book is particularly relevant to this blog as the author briefly reveals his investment strategy and a large part is to use gilts.
First some brief terminology.
Black Swan = Totally Unpredictable Event, Unlimited possible losses or gains
Gray Swans (a kind of ‘cheat’ the author introduces in part 3) = Semi-Predictable Event, Semi-Predictable losses or gains (e.g. a stock market crash).
Note that the instance a ‘Black Swan’ occurs it then becomes a ‘Gray Swan’ in the future.
In chapter 13, he suggests that the best way to invest, so as to take advantage of ‘Gray Swans’, is to invest 85-90% in gilts and the remainder in incredibly high risk, highly leveraged assets.
In chapter 7 he refers to this strategy as ‘bleeding’ where he takes continuously small losses (for potentially many years) and finally hits the jackpot (presumably during the various stock markets crashes).
Note that I have tied these ideas together myself (as they are kind of spread out throughout the book) and I may be misunderstanding the authors strategy/message (DYOR). Anyway, I would not think that many people could win by doing this (just a few lucky ones).
One of his pet hates is Modern Portfolio Theory (MPT) which he thinks is invalid because it does not directly factor in ‘Gray Swans’. However I cannot help but feel that MPT is actually one of the best ways to counteract ‘Gray Swans’ and allows the maximum number of people to benefit from the stock market. Richard’s chart above highlights clearly the long term upward trend of the stock market which is what MPT is meant to take advantage of.
I think that this is also a dangerous game to look at the past. After all if we were looking at this chart in 1999 we would be confidently predicting further equity growth with no sign of an imminent crash! The trouble is there are too many many people with too much to lose in the financial services industry - and of course this website if people start to take their money out of equities and put it somewhere else.
Which brings me to this question.
” If we believe the market is going to crash, or at least fall, and we have lots of equity ISA’s and pension funds, what should we switch to in order to consolidate during the downturn.
I ask this because there seems to be widespread belief in a downturn for property and equities. I’m expecting you to say bonds, but how do we choose / switch to those?
Hi John.
I don’t agree it’s dangerous to look at the past! Though it is dangerous to look at the past, extrapolate a trend and then project it indefinitely into the future, which is I think the point you are making. At some point in the future a bear market is inevitable - and it seems to me there are two ways investors can prepare for that: 1. They can work out how to time the market and switch into different assets (e.g. bonds as you suggest) or 2. Go on investing in shares regardless. And although it might sound insane, actually, if you keep your head about you it can be profitable. So, not being a bonds specialist, I’ll duck your question in the hope that someone else chips in.
Duncan.
The Sarasin Chiswell Investment Handbook (linked in one of my comments above) has a table showing total returns for property against equities, gilts, cash and inflation on page 45. I’m seeking permission to republish the table in full, but until then you can find it in the Handbook. The returns, since 1947 are:
Property 10.7%
Equities 12.8%
Gilts 6.6%
Cash 7.0%
Inflation 5.8%
Sarasin Chiswell says:
The Barclays Capital Equity Gilt Study (2004) has a chart since 1987 showing property comfortably beating equities to 2003, but I suspect equities will have caught up by now.
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