The Investment Scientist

Recently a client asked me why we bother with investing in international markets.  After all, the S&P 500 has done quite well in the last year. Indeed, it has outperformed foreign markets three years in a row, and by a huge margin to boot. Take 2014 for example-the S&P 500 was up 13%, while the international markets on aggregate were down 5%.

So why then? Well, let’s look at this table …

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Recently, I did a long horizon return study based on 100 years of stock market data and inflation from 1916 to 2015.

The study assumes a 20-year investment horizon. If your primary reason for investment is for retirement security, this is the horizon that should apply.

In the study, I looked at rolling 20-year stock returns, inflations and (after inflation) real stock returns. I present the results in the table below. The first and second columns are the beginning and ending years of the 20- year period. The third column shows the nominal growth of $1 invested in S&P 500 in the corresponding period. The fourth column shows the shrinkage of $1 due to inflation in the corresponding period. The fifth column shows the real (after inflation) growth of $1 invested in S&P 500.

1. During the last 100 years, inflation (cash is losing value) is the norm, while deflation (cash is getting more valuable) only occurs during the Great Depression.
2. In the 20-year span that has the worst inflation (between 1968 and 1987,) cash loses 71% of its value.In the medium case, cash loses 45% of its value in 20 years.
3. During the last 100 years, stocks always make money in any given 20-year period. Even in the worst 20 years (between 1929 and 1948) which includes the Great Depression, you get $1.95 for $1 invested in stocks. (If you use my dividend strategy, you could do a lot better.)
4. In the medium scenario, stocks give you 4 times real return; In the best scenario, stocks give you 10 times real ret Read the rest of this entry »