Investing on the stock exchange: is it still worthwhile?

The best advice for investing in the stock exchange after a rise of more than ten years.

Stock market investment: a prerequisite

In this article, I will examine in detail the MSCI World Index, with reinvestment of dividends. Since the index has been available in both Dollars and local currency since 31/12/1969 and in Euro since 31/12/1998, we can find out how it has behaved during the severe crises of the last 40 years.

In addition, we have a rather long historical series that will allow us to draw significant conclusions about the future performance of the markets.

Past and future stock market yields

Despite the passage of time and the succession of crises, equity market yields have shown a fairly stable trend.

In particular, from December 1969 to August 2019, the MSCI World Index produced a compound average annual return of 9.47% in US dollars and 8.90% in local currency.

The correlation coefficient was 0.998. This means that the currency impact on the investment was very modest.

If we go and see what happened to those who invested in the world stock exchanges using the Euro, we notice two interesting things:

the arrival of the single currency coincided with the peak of the world stock market

Index yields in Dollars, local currency and Euro tend to converge.

In detail, from 31 December 1998 to 31 August 2019, the MSCI in Dollars yielded an average of 5.47% per annum. The MSCI in local currency yielded 5.45% per annum, while the Euro index gained 5.80%.

How much will it return to invest on the stock exchange?

Although the last 20 years have been marked by two crises (speculative bubble and sub-prime crisis), the average return on global equities is very significant.

I mean that after the acceleration of the 1990s, world stock market yields have stabilized at around 6% per year. It would seem that this is a low figure, but it is not so.

In fact, the return achieved since 1969 is affected by the exponential growth of the stock markets until 2000. In my opinion, this growth was caused by a number of non-recurring factors:

  • the explosion in assets under management, which brought the savings of millions of people to the stock exchange and raised prices
  • the fall in interest rates, which has knocked out many government bonds
  • the spread of the Web and the Internet.
  • In other words, the yield before 2000 includes a strong “speculative” presence that in subsequent years has failed. It is therefore absolutely logical to assume that the future performance of the stock exchanges will be based on the average performance of the last 20 years.

In short, the 6% average annual return from a stock portfolio, achieved in a twenty-year period of low inflation, is also confirmed in the studies of Siegel (Stocks for the long run) in which estimates the average return of the stock market corrected for inflation in the order of 6%.

Towards a new 1929?

Many investors are concerned that a new financial crisis or recession may destroy the value of their investments. However, examining history gives us a reassuring lesson: crises pass, while returns remain.

The stock market crisis in 1973 – 1974

The two-year period 1973 – 1974 was characterized by “stagflation”. The rise in the price of oil caused both a rise in prices and an economic recession.

In short, the MSCI in Dollars lost 35.43% in the two-year period. In 1973, a 14.51% drop was achieved, followed by a 24.48% drop the following year.

Despite the fact that the two-year decline has thrown many investors out of the market, by the end of 1976 the world stock exchanges had made up for all the lost ground.

Those who were able to resist the temptation to sell everything at the worst possible time in the following years made an unprecedented profit. But he had to go through two years of consecutive downturns.

The downturn of 2007 – 2008

In a similar way to the previous one, the 2007 crisis was also triggered by a recession. The financial crisis caused by subprime mortgages exacerbated the recession.

However, the decline was quite similar: in 2008 the MSCI index in Euro lost 37.24%. Unlike in the 1970s, it all happened in just one year. In other words, the crisis was shorter in duration, but more intense.

2007, on the other hand, closed at a break-even point of -1.18%.

Unlike 1973, the recovery time was slightly longer: 5 years. In fact, the prices returned to the level before the crisis at the end of 2012, after passing through a 2011 “reversal”.

Tips for investing on the stock exchange

The history of the markets gives us very important and useful lessons for those who want to learn.

First of all, it is good to enter into the perspective that an investment in shares will yield about 6% per annum average compound. Those who want to pursue mirages of 10% or 15% a year will do well to trade on cryptocurrencies, running all the risks involved.

Secondly, it is good to diversify the portfolio a lot, because history repeats itself but in a different way. And having a portfolio that is concentrated or overexposed on a geographical area or sector can be dangerous.

Also, it’s a good idea to account for at least a 35-40 percent drop that can develop over one or two years. Knowing this first will avoid selling at the wrong time, as unfortunately many do.

Finally, it is good to keep the equivalent of 4 years of current spending invested in short-term bonds. If, in fact, the stock markets fall, it is essential to give them time to recover, taking advantage of other available resources.

Why it is worthwhile to invest on the stock exchange

Interest rates are at an all-time low. And if the 6% offered by a complex portfolio of global equities seems little, think about the 1% offered by ten-year BTPs!

Interest rates will rise in the coming years, or at least remain stable. This means that buying too many bonds today involves increased risks and falling profits.

In addition, the average 6% offered by the global MSCI can be improved, provided you create an optimal allocation for yourself.

Whether you want to continue with your training, or stop there, remember that the future is equity. Although we will have to go, sooner or later, through a -30%.

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