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Investors should be prepared for lacklustre returns over the next several years that fall well short of what stock and bond markets have generated over the past 120 years.

That’s just one of the many takeaways from the annual release this week of what is known as the bible of long-term, buy-and-hold investors: the Credit Suisse Global Investment Returns Yearbook 2021.

Yearbook 2021 sees average annual real gains of 3 per cent for equities and minus 0.5 per cent for bonds over the next 20 to 30 years. This generates 2 per cent a year on a portfolio composed of 70-per-cent equities and 30-per-cent bonds.

Now compare that with the past. The average annual real return over the 121 years from 1900 to 2020 is 5.3 per cent for equities, 2.1 per cent for bonds and 0.8 per cent for U.S. Treasury bills (after inflation and conversion to U.S. dollars), according to the latest tabulations detailed in the Credit Suisse report.

The update on historical returns drills down further, by individual countries, different time periods and other dimensions. For example, during the baby boomer era from 1950 onward, the average annual real return for global equities was 7.1 per cent. For the millennial period from 1990 onward, the average came in at 5 per cent.

Although millennials have received lower returns on equities than boomers to date, the decline in inflation since the 1980s has given them a stellar annual real return on bonds of 5.8 per cent. By comparison, boomers have received 3.6-per-cent annually on bonds.

Why such low expectations? It’s a reflection of the current environment of low and negative real interest rates. “If real equity returns are equal to the real risk-free rate [on T-bills] plus a risk premium, it follows that when the real interest rate is low, subsequent equity and bond returns will be low,” explain the authors of Yearbook 2021.

Reinforcing this view is a study the authors did on their huge database of historical returns. They found a strong, direct correlation between the level of real interest rates and real equity/bond returns five years out. In short, when real rates are low, equity and bond returns will be low too.

One might try to do better than these expected returns by resorting to factor investing – that is, by loading up on stocks with traits that academic studies have found earn premium returns. Yearbook 2021 lists five factors that its three authors – Cambridge University professor Elroy Dimson and London School of Business academics Paul Marsh and Mike Staunton – found to have noteworthy premiums over long periods and across countries.

They were: size (small caps beat big caps), value (high book-to-market ratios – suggesting a value stock – beat low ratios), income (high dividend yields beat low), momentum (winners beat losers) and volatility (low volatility beats high).

However, these factors can go through long periods of underperformance. The worst case has been the value factor, now underwater for 37 years. It might thus be wise to make sure your portfolio is not concentrated in any one factor but instead diversified over several.

The Credit Suisse Global Investment Returns Yearbook usually picks a special topic each year to examine in depth. For Yearbook 2021, it is emerging markets, which currently account for 43 per cent of world gross domestic product but only 14 per cent of global equities.

“Investors should not be deterred from investing in emerging markets because of risk,” Prof. Dimson advises. His work shows that they are becoming a lot less volatile. Furthermore, there is enough of a difference in fluctuations for emerging markets to offer diversification opportunities.

Emerging markets also present an opportunity to participate in higher rates of economic growth. Indeed, their equity markets are already outperforming developed market equities, by about 1.5 percentage points a year since 1960.

Prof. Dimson further discovers that the five factors driving premium returns are present in emerging-market countries. And he has uncovered additional premiums from investing in emerging markets with higher dividend yields, weak currencies and/or low growth in the past.

Much more information is to be found in Yearbook 2021. The full report is not currently available online, only in hardcopy from sponsor Credit Suisse. (To prepare this report, the The Globe and Mail used an extensive, but not comprehensive, summary of the Yearbook.)

The buy-and-hold faithful might consider placing a copy on their night tables or other places frequently visited. With its historical perspective, the Yearbook never fails to remind one how positive returns can be earned over the long term on balanced portfolios if investors can just hold onto stocks and bonds when the news turns gloomy. Those returns could be on the low side over coming years, but may still surprise nonetheless. And then there is the longer term beyond.

Larry MacDonald can be reached at

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