The volatility in Donald Trump’s head has been projected onto the markets over the last month or so. One day he is happy with a potential deal with Iran and the markets shoot up, and the next day he is going to bomb Iran out of existence and the markets fall.
As longer-term investors, we can sit on the sidelines and just watch the show, but shorter-term traders who believe they can beat the market, are running around like headless chickens. Talking about beating the market: the term refers to people who believe in buying and selling individual shares rather than investing in a basket of shares, because they think they know something about those shares before the rest of the traders know about it. This is not what we believe to be the right way to go about investing your money. Investing is not a competition and you don’t have to beat anything except maybe inflation.
There was an interesting piece in a VestAct newsletter some time ago about somebody doing research about exactly this idea of beating the market and his findings were very interesting. He crunched the numbers on 29 754 stocks, and the value-weighted equity portfolio return was found to be 10.1% per annum. This compares very favourably to the 3.3% per annum from US Treasury bonds. The FT summarised this finding as follows: “One hundred dollars invested in T-bills back in 1926 would have grown to a handsome $2 534 today. The same $100 invested in a market-weighted portfolio of stocks would have grown to a more princely $1.5 million”.
There are some other important insights from this work. Notably, most single stocks suck. Three-fifths of shares have underperformed bonds. Also, the median stock has, since 1985, suffered an 85 per cent drawdown. Finally, half of the $91 trillion of net wealth created over the last century by owning US stocks comes from just 46 companies.
To sum this all up: it is clear that investing in the broader equity market has been very lucrative, but not so much in the bond market. It also shows that you have been very lucky to have been invested in those few shares that did very well since 1985.