The superiority of the stock investment
December 20, 2018 | Digital Asset Management
In the long run, returns on equities outperform the returns on all forms of investment such as bonds, cash, precious metals, or even real estate by far.
Global equities have outperformed bonds and treasury bills since 1900. Over the past 118 years, equities have generated an annual real return of 5.2%, while global bonds have generated an annual real return of only 2%. This means that equities outperformed bonds by an average of 3.2% per annum.
The following chart shows the impact of this differential over the years. The chart refers to the US market. With an annual performance of +6.5%, the US equity market outperformed the world equity market by +5.2%.
The real performance of the investments
The graph on the left shows the development of equities versus bonds and liquidity, excluding inflation (nominal). The chart on the right, on the other hand, takes into account an average inflation rate of 2.9% p.a. and therefore shows the real performance of the investments.
Source: Credit Suisse Global Investment Returns Yearbook 2018
Why the yield on real estate decreases
The most recent statements, according to which real estate offers a large financial gain with less risk, are not correct. This is because real estate prices have only exploded as a result of extreme interest-rate policy interventions by central banks with penalties on money deposits. In the long run, higher real estate prices will put themselves into perspective. Taking into account the costs associated with real estate, inflation and the recent price rises just mentioned, the rental yield to be achieved is anything but attractive.
The risks of real estate investments
Real estate investments usually incur high ancillary costs such as land transfer tax, land registration costs, contract- and trust costs and brokerage costs. Additional maintenance costs are incurred just to maintain the value of a property. When buying a property, a great deal of capital is also tied up in a single investment. If this property serves the purpose of commercial letting, the risk of damage and loss of income by a tenant increases. In addition, it should not be forgotten that most landlords own property used by themselves – this increases the cluster risk, as the total assets are invested mainly in one asset class.
Other negative factors that reduce the attractiveness of a property include political efforts to put a brake on rental prices or further tightening of the tenancy law. This severely restricts real estate owners’ and landlords’ scope for action. The additional danger of rental nomads and the threat of damage can be immense and must not be underestimated.
What you can still learn from a real estate investor
What real estate investors have in advance of the typical equity investor, though forced to do so, is not to look at the price of their investment on a daily or weekly basis. Since the price of the property the investor has bought is not published daily on a stock exchange, he looks at his investment property over many years. Most equity investors are unfortunately distracted by the daily ups and downs of the stock markets. And let themselves be distracted from the actual idea of why they bought a share: The participation in a company, the business model, the management and the future prospects of which they are convinced of.
Many real estate investors buy real estate because it is a real, “tangible” value. Shares are investments in a company and therefore less tangible, but they are just as real valued as real estate. As the owner of a share, you are a co-owner of a real company that has an actual tangible and capitalized value – just like real estate.
Shares vs. precious metals
Precious metals and gems are not an effective hedge against inflation. Gold, silver, and diamonds led to even lower returns than US government bonds. Even though tangible assets, which are so highly valued by many, offer a high degree of protection, they still do not generate a return.
Despite strong fluctuations, the stock markets offer the highest returns in the long run among all forms of investment. However, this only applies to investors who remain invested for the long term and keep a cool head in times of crisis and do not sell in panic as soon as the market goes into reverse gear. Share price developments cannot be predicted in the short term. As a result, most investors often sell at the worst possible time as they try to time the market. Finding the right entry point again after a sale is almost impossible and resembles playing the lottery. Who knows when a correction is over and the time for a re-entry has come? From a value investor’s point of view, selling only makes sense if an investment is actually overvalued.
The ever-popular savings book or liquidity is a very poor investment. In the current low-interest environment (currently approx. 0%), every investor who is invested in cash loses purchasing power through inflation. (1€ remains 1€ in the account, but it loses value after some time. For example, 1 liter of milk cost 1€ a few years ago. Today this euro is no longer enough and you need 1.20€ for 1 liter of milk. So the euro has lost value).
Why liquidity still makes sense in an investor’s overall asset statement is not because of its interest rate. A cash reserve should always be available to cover planned or unforeseen expenses. This flexibility also protects against having to sell shares in a phase of undervaluation when money is needed.
Source citation:
Source: Credit Suisse Global Investment Returns Yearbook 2015 and 2018.
The Credit Suisse Global Investment Returns Yearbook (“Yearbook”) has become a key reference for long-term return data and expected risk premia for 23 national equity and bond markets. It is published by the Credit Suisse Research Institute in collaboration with professors at London Business School.
The Global Investment Returns Yearbook examines long-term risks as well as historical extremes of investment performance. It documents, on a global basis, the long- and short-term returns of equities and bonds, based on a detailed and complete data series going back 118 years.
Estably is the first Liechtenstein-based digital asset management firm to offer world-class asset management through a blend of technology and human investment expertise. Thanks to the portfolio managers’ many years of experience in the field of value investing, the aim is to achieve above-average returns – starting at an investment sum of € 20,000. The aim is to make professional asset management, which was previously possible exclusively for major investors, accessible to everyone – in a convenient, transparent and profitable way.
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