Credit Suisse Global Investment Returns Yearbook 2013

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Credit Suisse Global Investment Returns Yearbook 2013

Postby stratton » Fri Feb 08, 2013 8:34 pm

Credit Suisse Global Investment Returns Yearbook 2013

This years edition is out with articles and data by Elroy Dimson, Paul Marsh, and Mike Staunton, London Business School, authors of Triumph of the Optimists.

From the Forward:
across 25 countries. The Credit Suisse Global Investment Returns
Sourcebook 2013 further extends the scale of this resource with
detailed tables, graphs, listings, sources and references for every country.
With their analysis of this rich dataset, Elroy Dimson, Paul Marsh
and Mike Staunton from the London Business School provide important
research that helps guide investors as to what they might expect from
market behavior in coming years.

To start with, the report examines the post-crisis investment landscape,
highlighting historically low yields on sovereign bonds, with real
yields in many countries now negative. At the same time and notwithstanding
the recent rally in equities, developed market returns since
2000 remain low enough for many commentators to continue asking
whether the cult of equity is dead. Against this backdrop, the authors
ask what rates of return investors should now expect from equities,
bonds and cash. In brief, they hold that investors’ expectations of asset
returns may be too optimistic.

Then, continuing the theme of investing in a post-crisis environment,
they examine mean reversion in equity and bond prices. This second
chapter of the 2013 Yearbook examines the evidence for mean reversion
in detail, and whether investors can exploit it. In fact, it shows that
the evidence on mean reversion is weak and that market timing strategies
based on mean reversion may even give lower, not higher, returns.

Finally, with the improving business cycle in mind, Andrew Garthwaite
and his team analyze whether inflation is good for equities. Drawing on
the Yearbook dataset, they assess what type of inflation we may see in
the future, and what equity sectors, industries and regions offer the best
inflation exposure.

Paul
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Re: Credit Suisse Global Investment Returns Yearbook 2013

Postby bobcat2 » Fri Feb 08, 2013 11:20 pm

Over the 113 years from 1900 to 2012, the middle chart shows that the real return on the world index was 5.0%
per year for equities, and 1.8% per year for bonds.

That's a 5% LR return for equities, which is a far cry from the mythical 7% LR return for equities we often hear about. :|

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Re: Credit Suisse Global Investment Returns Yearbook 2013

Postby Dale_G » Sat Feb 09, 2013 2:01 am

bobcat2 wrote:That's a 5% LR return for equities, which is a far cry from the mythical 7% LR return for equities we often hear about. :|


And that was in the glorious past. Over the next 20-30 years Credit Suisse is looking for real returns of 3% to 3.5% from equities and 0.9% real returns from bonds. Those wonderful bond returns are obtained in the rather distant future, Credit Suisse expects 0 to negative real returns for the next 8 years or so.

The yearbook is not an easy read, but I like the breezy style, and since they agree with my own view of future prospects, I'll continue to slog through it to the bitter end :)

Thanks for the link stratton.

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Re: Credit Suisse Global Investment Returns Yearbook 2013

Postby hafius500 » Sat Feb 09, 2013 5:40 am

Financial Times - Austria’s 97 years of loss offer lessons, By John Authers (You may try to google the title)

Authers gives a very short summary of valuation-based market-timing:

The academics tested a strategy that sold stocks and went into cash every time price-to-dividend multiples went clearly above their historic mean at the time, and re-entered when they had become cheap. Despite expectation, in all of the 20 countries they studied, this strategy fared worse than simply buying and holding stocks. In Austria, Italy and Japan, it inflicted outright losses.
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Re: Credit Suisse Global Investment Returns Yearbook 2013

Postby michaelsieg » Sun Feb 10, 2013 12:38 am

Thanks for the link stratton,
I found figure 5 interesting, it kind of seems to contradict of the way we look at negative or absent correlations between equities and bonds. This figure seems to show the opposite, that if bonds have a real (after inflation) negative yield (to the left side of the figure) that the stock markets also seem to have low returns - or did I miss something? May be the periods of very negative bond real returns (all the way to the left) were inflationary periods and what we see is the impact of significant inflation on stock markets. Thanks again for the interesting read!
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Re: Credit Suisse Global Investment Returns Yearbook 2013

Postby FoolStreet » Sun Feb 10, 2013 2:53 am

stratton wrote:Credit Suisse Global Investment Returns Yearbook 2013

This years edition is out with articles and data by Elroy Dimson, Paul Marsh, and Mike Staunton, London Business School, authors of Triumph of the Optimists.

From the Forward:
across 25 countries. The Credit Suisse Global Investment Returns
Sourcebook 2013 further extends the scale of this resource with
detailed tables, graphs, listings, sources and references for every country.
With their analysis of this rich dataset, Elroy Dimson, Paul Marsh
and Mike Staunton from the London Business School provide important
research that helps guide investors as to what they might expect from
market behavior in coming years.

To start with, the report examines the post-crisis investment landscape,
highlighting historically low yields on sovereign bonds, with real
yields in many countries now negative. At the same time and notwithstanding
the recent rally in equities, developed market returns since
2000 remain low enough for many commentators to continue asking
whether the cult of equity is dead. Against this backdrop, the authors
ask what rates of return investors should now expect from equities,
bonds and cash. In brief, they hold that investors’ expectations of asset
returns may be too optimistic.

Then, continuing the theme of investing in a post-crisis environment,
they examine mean reversion in equity and bond prices. This second
chapter of the 2013 Yearbook examines the evidence for mean reversion
in detail, and whether investors can exploit it. In fact, it shows that
the evidence on mean reversion is weak and that market timing strategies
based on mean reversion may even give lower, not higher, returns.

Finally, with the improving business cycle in mind, Andrew Garthwaite
and his team analyze whether inflation is good for equities. Drawing on
the Yearbook dataset, they assess what type of inflation we may see in
the future, and what equity sectors, industries and regions offer the best
inflation exposure.

Paul



They never did explain what inflation would do to equities....
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Re: Credit Suisse Global Investment Returns Yearbook 2013

Postby Browser » Sun Feb 10, 2013 1:22 pm

Memo to Equity Cultists:
To assume that savers can confidently expect large wealth increases from investing over the long term in the stock
market – in essence, that the investment conditions of the 1990s will return – is delusional.
If we have data, let’s look at data. If all we have are opinions, let’s go with mine. – Jim Barksdale
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Re: Credit Suisse Global Investment Returns Yearbook 2013

Postby staythecourse » Sun Feb 10, 2013 1:37 pm

Once again more data supporting high equities for long time horizons. No matter how poor equities do they almost aways do better then bonds and if they don't they dont trail by much (<20%). Makes you wonder what is more "risky".

Good luck.
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Do Bonds Have Real Returns?

Postby EDN » Sun Feb 10, 2013 2:05 pm

I don't know what "equity cultists" are, but if I look at the long-term data on the 20 countries with perspective back to 1900, I see almost 1/3 have not earned a real return on their bonds or bills for over 110 years. And the scant return for bonds over bills took about 100 years to materialize.

I guess we may focus on Austria as a country that "proves" the long-term risk of stocks (+0.6% real returns for 113 years), but when the alternatives are -4% real bond returns and -8% bill returns, on a relative basis the equity premium still seems large & beneficial, warranting balanced portfolios with an equity bias to prolong bankruptcy as long as possible.

I also notice that only one of the 20'countries hasn't seen a much higher return for bonds in the last 50 years than the entire sample (probably inflating the actual equilibrium real bond return). A quick approximation reveals that almost no country earned a real bond return for the 62 years beginning in 2000.

If the idea of investing is to try and at least earn a positive return in excess of inflation, it should be strongly questioned whether or not bond-heavy or all-bond portfolios represent investing? Bonds are great to dampen equity declines and to provide an asset to sell during tough times, but going overboard with bonds clearly strips away any chance of real portfolio growth. As scary as bear markets seem, going broke seems infinitely moreso.

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Credit Suisse Global Investment Returns Yearbook 2013

Postby bobcat2 » Sun Feb 10, 2013 4:31 pm

staythecourse wrote:No matter how poor equities do they almost aways do better then bonds and if they don't they dont trail by much (<20%).


EDN wrote:If the idea of investing is to try and at least earn a positive return in excess of inflation, it should be strongly questioned whether or not bond-heavy or all-bond portfolios represent investing? Bonds are great to dampen equity declines and to provide an asset to sell during tough times, but going overboard with bonds clearly strips away any chance of real portfolio growth.


Annualized real returns on major asset classes (%) 2000-2012
Code: Select all
                Equities               Bonds
US               -0.2                   6.4
World             0.1                   6.1


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Re: Credit Suisse Global Investment Returns Yearbook 2013

Postby stlutz » Sun Feb 10, 2013 4:35 pm

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Re: Credit Suisse Global Investment Returns Yearbook 2013

Postby Browser » Sun Feb 10, 2013 4:35 pm

I don't think there's an answer switching from equities to bonds. But the answer sure isn't loading up on equities either. Don't forget the "risk" part of investing in equities. The thing about equity risk is that it hasn't decreased just because expected returns are lower. Which means you'll get lower returns for taking the same amount of equity risk going forward. So, some folks might want to consider whether they want to adjust that by reducing their equity allocation somewhat. In any event, the safest "solution" to low returns from both bonds and equities is to increase one's savings rate, delay retirement, or lower expectations for a "safe withdrawal rate" from 4% real to perhaps 3% or so.
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Re: Credit Suisse Global Investment Returns Yearbook 2013

Postby nisiprius » Sun Feb 10, 2013 6:46 pm

Paul, thanks for the reminder. I missed my chance at a $25 copy of Triumph of the Optimists, but the Credit Suisse Global Investment Returns Yearbook is almost as good (and more frequently updated).
EDN wrote:If the idea of investing is to try and at least earn a positive return in excess of inflation, it should be strongly questioned whether or not bond-heavy or all-bond portfolios represent investing? Bonds are great to dampen equity declines and to provide an asset to sell during tough times, but going overboard with bonds clearly strips away any chance of real portfolio growth.
Going overboard on anything is never a good idea. 100% bonds is almost surely a bad idea, and so is 100% stocks. Benjamin Graham suggested that the investor should never be less than 25% or more than 75% invested in stocks.

However, my idea of investing is to try and earn

a) enough

b) over the specific period of time in which I'm investing, which--which is a curve that starts in 1978, with contributions peaking and heavily weighted during a fairly constrained period of time--maybe 1985-2008, and ends statistically at about 2033 plus-or-minus--hopefully plus.

I'd certainly like a positive real return, but "enough" could be less than that.

And the period of time I'm interested in is my own investing lifetime, not "the long run."

If I have a lousy run of luck over the next fifteen years, it won't help me if the stock market reverts to the mean later.

If I have a good run of luck over the next fifteen years, it won't hurt me if the stock market reverts to the mean later.

More equities increases my statistical return expectation, but also increases the role of luck. That's fine, and that's why different people make different choices. I don't have any problem at all with people who like equities because they really do understand and accept the risk/chance/volatility. I do have a problem with people who suggest that equities "over 20 years and more, stocks are no more risky than Treasury bonds or even bills." (That's not you of course, but that is not a straw man, either. It's a verbatim quotation from Glassman and Hassett).

P.S. I haven't checked the current edition, but I once leafed through Siegel's Stocks for the Long Run page by page, trying to find out what his definition of "the long run" is. How many years? I'm pretty sure he just never says. I think the closest he gets to a definition is the place where he talks of the "extraordinary stability" of returns over the three unequally-long "subperiods," 1802-70, 1871-1925 and 1926-present (i.e. 69, 55, and 81 years respectively). So, fifty to eighty years is the period of time it takes mean reversion to do its work and dampen out the effect of luck in stock investing.
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The Lesson From 2000-2012

Postby EDN » Sun Feb 10, 2013 8:58 pm

bobcat2 wrote:
staythecourse wrote:No matter how poor equities do they almost aways do better then bonds and if they don't they dont trail by much (<20%).


EDN wrote:If the idea of investing is to try and at least earn a positive return in excess of inflation, it should be strongly questioned whether or not bond-heavy or all-bond portfolios represent investing? Bonds are great to dampen equity declines and to provide an asset to sell during tough times, but going overboard with bonds clearly strips away any chance of real portfolio growth.


Annualized real returns on major asset classes (%) 2000-2012
Code: Select all
                Equities               Bonds
US               -0.2                   6.4
World             0.1                   6.1


BobK


Bob,

To my knowledge, US and Int'l LG stocks (represented by cap-weighted broad market indexes) are the only equity asset classes with negative real returns since 2000 (and US LG the only asset class that entered 2000 in a bubble). US LV, US SC, US SV, US RE, Int'l LV, Int'l SC, Int'l SV, Int'l RE, EM, EM VL, EM SC all had positive real returns, some significant and approaching double digits.

The lesson in this short period is simply this: you should consider diversifying your equity exposure beyond US and Int'l Developed TSM (LG), just as 1966-1982 (another period of negative real returns on TSM but positive equity returns elsewhere).

But it's not like this is a 50+ year period, like, say, 1938-1988( real annualized returns):

US Stocks (S&P 500) = +5.9%
US Small Stocks (FF Small) = +10.1%
US Bonds (LT Gov) = +0.0%
US Bills = -0.3%

The lesson in this ultra-long term period? Relying on bonds for anything more than lower short-term volatility than stocks is tenuous, even over a period longer than an entire investment lifetime.

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Stocks vs Bonds over the last 50 years

Postby bobcat2 » Sun Feb 10, 2013 9:37 pm

Most Recent 50 year period 1963-2012

Annualized real returns on major asset classes (%) 1963-2012
Code: Select all
                     Equities                 Bonds
Austria                2.6                     4.5
France                 4.0                     5.4
Italy                 -0.1                     2.3
Japan                  3.3                     4.3



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Re: Credit Suisse Global Investment Returns Yearbook 2013

Postby rmelvey » Sun Feb 10, 2013 9:52 pm

Bob,

Where are you getting this data? Do you have annual returns for these countries?

Thanks!
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Re: Credit Suisse Global Investment Returns Yearbook 2013

Postby bobcat2 » Sun Feb 10, 2013 10:47 pm

rmelvey wrote:Bob,

Where are you getting this data? Do you have annual returns for these countries?

Thanks!


I am getting the returns from the subject of this thread - Credit Suisse Global Investment Returns Yearbook 2013. There is a link to the Yearbook in pdf form in the OP on this thread. They do not have year by year returns in the Yearbook. In general they have annualized returns 1900-2012, 1963-2012, and 2000-2012.

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Re: Credit Suisse Global Investment Returns Yearbook 2013

Postby grayfox » Sun Feb 10, 2013 10:54 pm



Thanks for posting that. Very good reading and lots of factual data in there.

Some Observations:
Lost empire Austria is interesting. Austrians are some of the most industrious people on the planet. Shouldn't have attacked Serbia. Lesson: Don't be on the losing side of two world wars.

Interesting how Russia went to zero in 1917. In the 1930's, many Americans wanted to follow that economic model. If it weren't for FDR, it could have happened here. And then China went to zero in 1949. Lesson: Revolutions are dangerous to your wealth. Not to mention your very life and liberty.

Like the man said, those cases show that stock market risk is not just some academic theory. Entire countries can go to zero.
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A Century of Negative Real Bond Returns?

Postby EDN » Sun Feb 10, 2013 11:59 pm

bobcat2 wrote:Most Recent 50 year period 1963-2012

Annualized real returns on major asset classes (%) 1963-2012
Code: Select all
                     Equities                 Bonds
Austria                2.6                     4.5
France                 4.0                     5.4
Italy                 -0.1                     2.3
Japan                  3.3                     4.3



BobK


Bob,

Looks like 1 country out of 20 had a negative real equity return? We'd expect that by chance alone. The world (including these countries) earned a real +5.2% per year over this period (and an identical 5.0% over the entire period).

But not all global portfolios fared so well over long petiods--to the naked eye, the global bond index had a negative real cumulative return from 1900 through about 1985? And didnt fully overtake t-bills in the return department until domeyime after 2000? So where one country had a negative full period real equity return, and another did in the '63-'12 sub-sample, the entire world bond index produced this disappointing result for almost a century?

If there is a more dismal long-term return history I haven't seen it. And that some keep most/all of their portfolios in this asset class is most puzzling.

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Re: Credit Suisse Global Investment Returns Yearbook 2013

Postby michaelsieg » Mon Feb 11, 2013 12:22 am

by grayfox » Sun Feb 10, 2013 10:54 pm

Thanks for posting that. Very good reading and lots of factual data in there.

Some Observations:
Lost empire Austria is interesting. Austrians are some of the most industrious people on the planet. Shouldn't have attacked Serbia. Lesson: Don't be on the losing side of two world wars.

Interesting how Russia went to zero in 1917. In the 1930's, many Americans wanted to follow that economic model. If it weren't for FDR, it could have happened here. And then China went to zero in 1949. Lesson: Revolutions are dangerous to your wealth. Not to mention your very life and liberty.

Like the man said, those cases show that stock market risk is not just some academic theory. Entire countries can go to zero.

Also astonishing that after the revolution, the bond markets in China and Russia also went to zero - they didn't honor any of the debt obligations of their previous governments...Revolutions are dangereous to your wealth no matter if you own stocks or bonds.
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Re: Credit Suisse Global Investment Returns Yearbook 2013

Postby Browser » Mon Feb 11, 2013 12:08 pm

More equities increases my statistical return expectation, but also increases the role of luck. That's fine, and that's why different people make different choices. I don't have any problem at all with people who like equities because they really do understand and accept the risk/chance/volatility. I do have a problem with people who suggest that equities "over 20 years and more, stocks are no more risky than Treasury bonds or even bills." (That's not you of course, but that is not a straw man, either. It's a verbatim quotation from Glassman and Hassett).

:thumbsup Exactly in a nutshell. You pays your money and you takes your chances.
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Re: Credit Suisse Global Investment Returns Yearbook 2013

Postby nisiprius » Mon Feb 11, 2013 12:31 pm

EDN wrote:Relying on bonds for anything more than lower short-term volatility than stocks is tenuous, even over a period longer than an entire investment lifetime.
I think it would be nice if you would make a point of qualifying that by saying "nominal bonds." TIPS, Canadian Real Return bonds, index-linked gilts, OATi's, etc. do exist. I realize that they only have two or three decades of history behind them, but I'm not sure that matters. If you buy one of them at auction, barring default, they will, in fact, earn whatever real return they were specified to earn when you bought them. Agreed, U.S. investors today can't get the TIPS and series I savings bonds I bought ten years ago, but they also can't get the stocks I bought in 1995, either (i.e. stocks with the performance those stocks had.
michaelsieg wrote:Interesting how Russia went to zero in 1917....Lesson: Revolutions are dangerous to your wealth.
As late as the early 1900s, some British investors were still trying to get the United States of America to honor their Confederate States of America bonds. (I do not think they succeeded).

Anyone know whether the Confederate States of America had a stock market?
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What Can We Expect?

Postby EDN » Mon Feb 11, 2013 1:00 pm

nisiprius wrote:
EDN wrote:Relying on bonds for anything more than lower short-term volatility than stocks is tenuous, even over a period longer than an entire investment lifetime.
I think it would be nice if you would make a point of qualifying that by saying "nominal bonds." TIPS, Canadian Real Return bonds, index-linked gilts, OATi's, etc. do exist. I realize that they only have two or three decades of history behind them, but I'm not sure that matters. If you buy one of them at auction, barring default, they will, in fact, earn whatever real return they were specified to earn when you bought them. Agreed, U.S. investors today can't get the TIPS and series I savings bonds I bought ten years ago, but they also can't get the stocks I bought in 1995, either (i.e. stocks with the performance those stocks had.


Nisiprius,

Basic economic theory teaches us that real-return bonds should underperform nominal bonds of the same maturity (because you pay a cost for the inflation hedging)--and underperforming an asset (nominal bonds) that hasn't produced much in the way of reliable real returns to begin with doesn't change our conclusions. And indeed, today, going out almost 20 years in maturity guarantees a negative real return. You can pick up about 0.5% real if you go out 30 years, but that is really stretching it for what is just a rounding error from 0%.

I'm not saying "don't own bonds". But lets be honest, they are a pretty dismal asset class that some have way too much exposure to.

As for what you can/cannot get today relative to 1995...we know those bonds/bond returns don't exist anymore. We don't know what stocks will return, although for a diversified US equity allocation* anyway, it doesn't appear that 1995-2012 (+11.4%) was that different from 1928-1994 (+11.9%). Should we expect 11% to 12% from stocks over the next 20 years? No, but its possible. And much more probable than positive real bond returns.

Eric

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Re: Credit Suisse Global Investment Returns Yearbook 2013

Postby Browser » Mon Feb 11, 2013 1:16 pm

It's probably a good idea to hold some stocks to diversify your bond holdings. Just in case bonds don't outperform stocks over the next three decades too.
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Re: Credit Suisse Global Investment Returns Yearbook 2013

Postby Valuethinker » Tue Feb 12, 2013 1:17 pm

grayfox wrote:


Thanks for posting that. Very good reading and lots of factual data in there.

Some Observations:
Lost empire Austria is interesting. Austrians are some of the most industrious people on the planet. Shouldn't have attacked Serbia. Lesson: Don't be on the losing side of two world wars.


Well. Relatively. Koreans and Americans work more hours per annum. So do Greeks, in fact.

Note Germany lost both world wars and Japan was devastated in the second. So, arguably, losing isn't always the worst thing that can happen. Britain won both, but has seen a long slow relative decline. France you can still seen the problems of 'victory' in two world wars.

Finland lost the second, having the privilege of being devastated by the Russians and *then* the retreating Germans. Turned out alright.

Italy was a 'winner' in the first World War, and a 'loser' in the Second, but post WW2 Italy has been economically successful and prosperous, for a time its GDP per capita (not adjusted for the considerable black economy) overtook the UK's. Post WW1 Italy was a lot less happy place. Maybe the trick is to lose? (technically Italy changed sides in 1943 and then was devastated in the Allied invasion and German occupation).

It was the Dual Monarchy of Austria and Hungary. And Hungary didn't come out so well of either WW1 or WW2-- it's about 1/3rd its pre WW1 size and population.

So Austria 'lost' two world wars and did well, Hungary did badly.

So I don't think there are general lessons there in what happened to Austria.

Interesting how Russia went to zero in 1917. In the 1930's, many Americans wanted to follow that economic model. If it weren't for FDR, it could have happened here. And then China went to zero in 1949. Lesson: Revolutions are dangerous to your wealth. Not to mention your very life and liberty.


Yes.

Like the man said, those cases show that stock market risk is not just some academic theory. Entire countries can go to zero.


Perhaps just as interesting is a case like the UK in the 70s, where without revolution, breakdown of government or society, a stock market can drop 80-90%.
Last edited by Valuethinker on Tue Feb 12, 2013 1:22 pm, edited 1 time in total.
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Re: Credit Suisse Global Investment Returns Yearbook 2013

Postby Valuethinker » Tue Feb 12, 2013 1:19 pm

nisiprius wrote:
EDN wrote:Relying on bonds for anything more than lower short-term volatility than stocks is tenuous, even over a period longer than an entire investment lifetime.
I think it would be nice if you would make a point of qualifying that by saying "nominal bonds." TIPS, Canadian Real Return bonds, index-linked gilts, OATi's, etc. do exist. I realize that they only have two or three decades of history behind them, but I'm not sure that matters. If you buy one of them at auction, barring default, they will, in fact, earn whatever real return they were specified to earn when you bought them. Agreed, U.S. investors today can't get the TIPS and series I savings bonds I bought ten years ago, but they also can't get the stocks I bought in 1995, either (i.e. stocks with the performance those stocks had.
michaelsieg wrote:Interesting how Russia went to zero in 1917....Lesson: Revolutions are dangerous to your wealth.
As late as the early 1900s, some British investors were still trying to get the United States of America to honor their Confederate States of America bonds. (I do not think they succeeded).

Anyone know whether the Confederate States of America had a stock market?


Actually several. In those days, stock markets were regional. It's an interesting question what happened to shareholders in the Reconstruction.
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Re: Credit Suisse Global Investment Returns Yearbook 2013

Postby Angst » Mon Feb 25, 2013 8:05 am

stratton wrote:Credit Suisse Global Investment Returns Yearbook 2013

This years edition is out with articles and data by Elroy Dimson, Paul Marsh, and Mike Staunton, London Business School, authors of Triumph of the Optimists.

Paul

Thanks so much for posting this. I'm a little late to the thread - spent well over an hour reading the pdf and found it very interesting. The first section on rates was fascinating and clarifying and for me was the best part of it all. The second section on mean reversion was interesting, if not too surprising, but I found the entire doc to be very readable and worthwhile.

I'm left quite content with my FI portfolio slowly, annually tilting more towards I-bonds and EE-bonds, as purchase limits permit.
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