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How well does the stock market perform in the long term?

In recent weeks there has been plenty of volatility in world stock markets. Both the FTSE 100 and Dow Jones saw their biggest one-day fall since 1987 while there have also been several short rallies.

While most experts would encourage you to be patient if you are investing for the long term, how do markets actually perform over a long period of time?

The FTSE

At the worst point in March 2020, the value of the FTSE 100 index had fallen by around 35% from its 12-month high.

Source: London Stock Exchange

Naturally, as an investor, you may be worried that such a fall has an impact on your portfolio. However, over the years, there have often been sharp corrections in markets. The chart below shows the calendar-year returns for the FTSE All-Share Index over the past 30 years.

Source: Vanguard

You will see that there have been eight years during this period where returns were negative. However, the average annual return over the whole period is 9.9% – even taking some sharp declines into account.

It’s not just UK equities that have generated a good return over time.

The MSCI World Index

The MSCI World Index has 1,643 constituents and covers approximately 85% of the free float-adjusted market capitalisation across 23 developed market countries including the UK, US, Germany and Japan.

Here’s the annualised returns of the MSCI World Index over one, three, five and ten years, and since its launch at the end of 1987.

Source: MSCI

Over the last decade, the index shows an annualised return of 9.36%. Between 31 December 1987 and 31 December 2019, the annualised return of global equities was 7.72%.

Again, this was despite some years where the index showed negative returns. Here’s the annual performance of the MSCI World Index since 2006.

Source: MSCI

You will see that there have been three years of negative returns during this period – in 2008, 2011 and 2018. However, as a whole, the index has risen since 2006 (and, indeed, since its launch in 1987).

Shares vs other asset classes

So, we’ve seen that, over time, equities in the UK and the world as a whole tend to generate positive returns, despite some short-term corrections.

But how do equities compare to other asset classes?

In 2019, the Barclays Equity Gilt Study compared the nominal performance of £100 invested in cash, bonds, or equities between 1899 and 2018.

The Barclays’ study shows that £100 invested in cash in 1899 would be worth just over £20,000 today.

If invested in gilts, the same £100 would be worth close to £42,000.

However, £100 invested in equities in 1899 would now be worth around £2.7 million.

The chart below shows a comparison between a range of asset classes over a shorter time period: in this case from 1990 to 2019. The chart shows the value of £10,000 invested in 1990.

Notes: Cash = ICE LIBOR – GBP 3 month; global equities = the MSCI World Index; US equities = S&P 500; UK equities = FTSE All-Share; inflation = Retail Price Index, (Jan 1987=100); global bonds = Bloomberg Barclays Global Aggregate; European equities = MSCI Europe; UK gilts = ICE BofA; UK gilt (local total return) emerging market equities = MSCI emerging markets; all shown gross of taxes and of fees and in GBP.

Source: Bloomberg and Factset and Bank of England, as at 31 December 2019

Again, you will see that the top five returns over this time period were in equities, with US equities leading the way.

UK equities outperformed UK gilts, global bonds and cash over this period, despite a range of market corrections including the burst of the dot.com bubble, the global financial crisis, the European sovereign debt crisis, and the Brexit referendum.

Bull and bear markets

Over recent weeks, you may also have seen talk of ‘bull’ and ‘bear’ markets.

  • Bull markets start from the lowest close reached after the market has fallen 20% or more, to the next market high
  • Bear markets start from when the index closes at least 20% down from its previous high close, through the lowest close reached after it has fallen 20% or more

Many commentators have suggested that, after one of the longest ‘bull’ runs in history, we are now entering a ‘bear’ market. With markets falling, you may be concerned about this, but the data shows us that bear markets tend to be short-lived, especially in comparison with bull markets.

The chart below compares bull and bear markets in the UK since 1925.

This chart is for illustrative purposes only; it does not constitute investment advice and should not be relied upon as such. The value of investments and the income from them can go down as well as up so you may get back less than you invest. Past performance is not a guide to what might happen in the future. Transaction costs, taxes and inflation reduce investment returns. The portfolios are hypothetical and are re-balanced annually on 1 January. All investment income is assumed to be reinvested, unless otherwise stated. No transaction costs or taxes are included.

Source: Bull and bear markets

You can see clearly from the chart that, while there have been bear markets over the last century or so, they have been relatively short compared to bull markets. Falls in market values have also been outweighed by subsequent growth.

Take a recent example. A bear market saw the value of UK equities fall by 41% in a 16-month period during the global financial crisis of 2008. However, the subsequent bull run saw the value of UK equities rise by 212% over the next 129 months.

The moral of the story

The investing moral of the story is that you should always remain focused on your long-term goals and ignore short-term market moves. All asset classes fluctuate in value in the short term, but they all tend to produce characteristic returns over the long term.

Shares tend to return more than bonds, and bonds tend to return more than cash.

If you have a good year, great! You may consider rebalancing or selling investments that have performed well and using the proceeds to buy others that haven’t. This ensures you remain in line with the asset allocation that you set at the outset.

And in a bad year? Stay calm. Remember your long-term plan and the reasons why you are invested the way you are.

Get in touch

If you have any queries about the performance of your investments, please get in touch. Email hello@sovereign-ifa.co.uk or call 01454 416 653.

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