MoneyWatch) Elroy Dimson, Paul Marsh and Mike Staunton are well known for their research on stock market returns. Their 2002 book, “Triumph of the Optimists,” provided evidence on stock market returns and the equity risk premium from 19 countries — two North American markets (the U.S. and Canada), eight markets from Euro currency area (Belgium, Finland, France, Germany, Ireland, Italy, the Netherlands and Spain), five other European markets (Denmark, Norway, Sweden, Switzerland and the U.K.), three Asia-Pacific markets (Japan, Australia and New Zealand), and one African market (South Africa). In October, they updated their data through 2010.
These 19 countries accounted for an estimated 89 percent of the world stock market in 1900. The remaining 11 percent came from markets that existed in 1900, but no data is available, as markets failed to survive (such as Russia in 1917 and China in 1949) and investors were wiped out. To quantify the maximum possible impact of omitted markets on the magnitude of the historical equity risk premium, the authors made the extreme assumption that all omitted markets became valueless, and that occurred for every omitted country in a single year. They calculated what risk premium investors would have earned if in 1900 they had purchased a holding in the entire world market, including countries omitted from the DMS database, and held this portfolio for 111 years. The following is a summary of their findings:
Investment returns can be extremely volatile. Losses can be huge. From peak to trough, U.S. stocks fell by 79 percent in real terms in the 1929-1931 Wall Street crash. The worst period for U.K. equities was the 1973-74 bear market, with stocks falling 71 percent in real terms, and by 57 percent in a single year (1974). 2008 was the worst year on record for eight countries, for the world index, the world ex-USA, and Europe.
For their 19-country world index, over the entire 111 years, geometric (compound) mean real returns were an annualized 5.5 percent, the equity risk premium relative to Treasury bills was an annualized 4.5 percent, and the equity premium relative to long-term government bonds was an annualized 3.8 percent.
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