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The Case for Long Run Equity Exposure

Nearly 100 years of S&P500 returns graphs

The above chart shows the compelling evidence for equity investment. $10 invested in the S&P500 in the 1930’s would have grown to around $80,000 today. The period covers the depression, WW2, 87 crash, the dotcom bubble, and the financial crises to name a few.


What the top right chart shows in log space, is that long run equity returns are relatively consistent. (The average annual return being 11.4 %*) Excluding the depression which one can argue was created by policy mistakes** this then rises to 12.7% and regardless of which event/crisis, there is a mean reversion to this trend. Despite the continual bearish commentary for virtually the entirety of my career recent performance doesn’t seem to be out of line.

Rolling holding periods graphs

Over shorter holding periods, returns are noisy as events and economic cycles dominate. Bear markets and “irrational exuberance” come and go. Bad periods tend to lead to good periods e.g. the 12 months to July 1933 and March 2009. (If you follow our argument outlined in March research: Vol as a driver of future returns, the 12-month period from March 2020-March 2021 is in our opinion, likely to produce another positive spike)


What is striking is that over long holding periods such as 25 years, (suitable for pension, ISA and Child Trust funds) average returns are stable. Generally speaking, any 25-year period over the last 100 years would have produced an average annual return of between 10 and 16%. The lowest point being the 25 years to the early 80’s which covered the stagflation of the 1970’s prior to the Reagan and Thatcher reforms. This subsequently led to the strongest 25-year period around the end of the Tech Bubble in 2000.


This month is my 25th anniversary of graduating from LSE and starting a city career. Even this period from 1995 covered the Tech Bubble/bust, and the 2008 financial crisis (i.e. a decade of zero returns) has managed an average annual return of 11% pa. Back then the world was a hugely different place. London property was trading at around 2.5 x first time buyer earnings and 10-year gilts were yielding 8%. There were lots of options as an investor. Today with London property trading around x10 first time buyer earnings and 10-year gilts recently hitting sub 10bp, there is a scarcity of sensible options for investors. Hopefully, this article will show that the case for long term equity investment is as clear as ever, and relative to alternatives, very compelling.


At Nutshell we also aim to further reduce the volatility over shorter holding periods through robust stock selection and our recession indicator. We also monitor the relative value of equity vs bonds and adjust the equity beta accordingly. We invest in a small selection of exceptional companies which typically perform well during stressed environments.


* Federal Reserve Bank of San Francisco “The Rate of Return on Everything, 1870-2015” went back even further and found a total average annual return of 11.08% over a 143-year period. Increasing post 1950 and 1980)


**Remarks by Governor Ben S.Bernake Nov 8 2002. Commenting on Milton Friedman and Anna Schwartz’s study of the Depression. “Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.” (Which was true, as shown in 2008 and 2020) 

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