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Stocks for the Long Run? Evidence from a Broad Sample of Developed Markets

Journal: Journal of Financial Economics

Date: 20220101

Author: Anarkulova, Aizhan; Cederburg, Scott; O'Doherty, Michael S.

Abstract:
We characterize the distribution of long-term equity returns based on the historical record of stock market performance in a broad cross section of 39 developed countries over the period from 1841 to 2019. Our comprehensive sample mitigates concerns over survivor and easy data biases that plague other work in this area. A bootstrap simulation analysis implies substantial uncertainty about long-horizon stock market outcomes, and we estimate a 12% chance that a diversified investor with a 30-year investment horizon will lose relative to inflation. The results contradict the conventional advice that stocks are safe investments over long holding periods.

Link: Google Scholar

Key Findings

High Long-Term Investment Risk

Analysis of stock returns across 39 developed countries from 1841-2019 reveals substantial uncertainty in long-term investment outcomes, with a 12.1% probability of real losses over 30-year periods.

Catastrophic Loss Potential

Even at 30-year horizons, there is significant risk of catastrophic investment outcomes, with the 1st percentile real payoff being just $0.14 and 10th percentile $0.85 on a $1.00 investment.

Conservative Investment Implications

Investors using the broad developed country sample choose more conservative stock allocations compared to those using US-only data, with optimal weights of 43% vs 75% in stocks for 30-year horizons.

Distribution of 30-Year Real Payoffs

  • Shows the wide dispersion in potential 30-year investment outcomes from $0.14 (1st percentile) to $53.45 (99th percentile)
  • Median payoff of $4.16 indicates positive expected returns but with substantial uncertainty
  • 12.1% probability of losing money in real terms over 30 years

Loss Probabilities Across Investment Horizons

  • Loss probability decreases with investment horizon but remains substantial
  • Even at 30 years, 12.1% chance of real loss in developed markets vs 1.2% in US
  • Demonstrates importance of considering broader market evidence beyond US experience

Optimal Stock Allocation by Investment Horizon

  • Developed market investors choose consistently lower stock allocations
  • Gap widens at longer horizons due to greater perceived risk
  • Reflects more conservative approach when considering global evidence

Contribution and Implications

  • Challenges conventional wisdom that stocks are safe investments over long horizons
  • Demonstrates importance of considering global evidence beyond US market experience
  • Provides practical guidance for retirement savings and portfolio allocation decisions
  • Highlights need for careful consideration of downside risk in long-term investment planning

Data Sources

  • Distribution of 30-year payoffs chart based on Table 4, Panel A showing percentiles of real payoffs
  • Loss probability chart constructed using data from Table 4 showing P(W < 1) across horizons
  • Optimal allocation chart derived from Table 8 showing portfolio weights for inflation-protected risk-free asset case