INVESTMENT FEARS & LONG RUN EQUITY RETURNS

One of my deepest investment fears is saving diligently over the next 10 to XX years, placing a good portion of my savings into stocks, and have the market move absolutely nowhere over this time frame. I also worry about showing up on the scene five minutes before the end of the party, similar to someone investing in the Nikkei (Tokyo Stock Exchange) just before the end of 1989.

In short, I am a worrywart that sometimes questions the popular belief that future long rung equity returns will outperform close to risk free investments, such as government bonds or sticking my money under the mattress.

I recently read Irrational Optimism, a paper by three London Business schools professors that studied the performance of 16 country stock indexes over the lat 103 years in order to challenge the notion that, over an interval of 20 years, equities provide positive real returns (i.e. provide returns that will beat inflation). Their research found that, "aside from the U.S., only three other equity markets... have never experienced a short fall in real returns (before costs and fees) over 20 years". Can you guess what country I was very and extremely excited to find in the top three?

That's right, Canadian equity stock markets have not had one 20 year period with negative real returns (see figure below).

So as long as I'm investing in Canadian, Australian, Danish or American equities over a period of 20 years, I can be somewhat reassured that I should beat inflation over my investment horizon.