A new global investment returns yearbook compiled by UBS provides a historical perspective on stock-market performance, diversification, and the risks and rewards of investing at record highs, Market Watch reports.
The findings highlight that while stock investing has been profitable over time, it comes with periods of significant volatility. The data also challenges common fears about market peaks, offering insights into long-term investment strategies.
The yearbook, authored by Paul Marsh and Mike Staunton of the London Business School and Elroy Dimson of Cambridge University, examines 125 years of market data and finds that stock-market investing has historically outperformed other asset classes.
- Since 1900, US stocks have delivered an average inflation-adjusted return of 6.6% per year, significantly outpacing bonds (1.6%) and bills (0.5%).
- Outside the US, global stock markets have averaged 4.3% per year after adjusting for inflation, underscoring the theme of US market dominance.
However, volatility remains a defining feature of stock-market investing. After major downturns, it has taken years for markets to recover:
- 15.5 years following the Great Depression
- 10 years after the mid-1970s oil shock
- 7.5 years post-dot-com bust
- 4 years after the 2008 financial crisis
This historical context serves as a reminder that market fluctuations are inevitable, but long-term investments have historically yielded strong returns.
The study also examines international and cross-asset diversification, finding that diversification has been beneficial for most countries, even if it hasn’t always worked for US investors since 1974.
- The Sharpe ratio, a measure of return per unit of risk, indicates that diversification across global markets has been useful for most countries but has offered less benefit to US investors in recent decades.
- The 60/40 portfolio model (60% stocks, 40% bonds) has historically provided a better risk-adjusted return than stocks or bonds alone.
- Within the stock market, diversification is crucial: 57% of individual stocks underperformed Treasury bills, and 71% failed to beat the market index from 1990 to 2020. However, the best-performing stocks compensated for the laggards.
A significant takeaway from the yearbook is that missing just a few key months in the market can drastically impact long-term returns.
- Excluding the worst 20 months over the past 125 years would have boosted annual returns by 3%.
- Excluding the best 20 months would have reduced returns by nearly 3% per year.
This underscores the risk of trying to time the market. According to the authors, investors should be well-diversified unless they are skilled stock pickers—otherwise, they are likely to underperform.
A common fear among investors is that investing at all-time highs increases the risk of a market downturn. However, the study finds no historical evidence that record highs signal a need to sell.
“Many people were saying for years that the US market was overweight in global portfolios, and those who exited early missed out on significant gains,” noted Elroy Dimson.
Paul Marsh advised investors to avoid excessive market scrutiny, stating:
“Don’t look at your portfolio frequently—just stay invested.”
As of early 2025, markets are experiencing mixed trends:
- US stock futures paused after a steep decline in the S&P 500 (-1.76%).
- Gold (+0.99%) has been rising, while the US dollar (-0.59%) has weakened.
- Corporate bonds remain relatively stable, with high-yield bond credit-default swaps at historically low levels.
Ongoing geopolitical and economic events, including US import tariffs, trade tensions with China, and shifts in global energy policy, continue to influence market movements.
