The one I think should be on every investor’s bookshelf is the Triumph of the Optimists. It was first published just after the millennium and authored by three professors – Elroy Dimson, Paul Marsh, Mike Staunton – at London Business School1. It has been updated and expanded (by time and by geography) each year since. The latest version is available from Credit Suisse publications2. At its heart is the most reliable long-term history of returns from cash, fixed income, and equity constructed where necessary from paper records. From this database flows insightful analysis.
First, the analysis shows the impact of inflation. Inflation has destroyed several fixed-income markets. But even when a country’s fixed income is wiped out, its equity market survives the ravages of inflation.
Second, the analysis shows that the real return (that is, in excess of inflation) on cash is remarkably stable at around 0.5% per annum across time and geography. It is almost a constant of investment, but 0.5% pa real does not serve investors. Once an investor’s liquidity requirements are satisfied there is no place for cash in the strategic asset allocation.
Third, the analysis shows that fixed income outperforms cash. And that equity outperforms fixed income. The former is by a meaningful extent, the latter is by a massive extent.
Fourthly, the analysis shows that the returns from fixed income and equity are not uniform, there is natural volatility from year to year. And, as we expect, the equity volatility is higher. The great equity crashes may generate headlines and doom mongering at the time – buy when there is blood on the streets, as the saying goes – but in the full picture for the long-term investor they are just blips in the equity performance. What Triumph of the Optimists shows is that while investing in fixed income and equity has risk – and this is nothing more than the inherent nature of markets, it is managed
with diversification – the bigger risk is not being invested in the market. Investors should set their strategic asset allocation to their objective and risk appetite then implement to give the full time in the markets that delivers long-term return.
1 Disclaimer: the author is an alumnus of London Business School. He has no connection with the book or its updates beyond a keen interest in the contents.
2 https://www.credit-suisse.com/about-us/en/reports-research/studies-publications.html
3 Source: Credit Suisse Global Investment Returns Yearbook 2023 Summary Edition, Figure 10
