The illusory magic of equities

There must be a financial advisor out there somewhere who doesn't buy into the proposition that "equities will always outperform bonds in the long term", but if there is, I've never met him or her.  As I've mentioned here before, I like to ask new financial advisors when the US equity market returned to the levels it had attained just before the Great Crash of 1929.  I haven't yet met one who knows the answer, which is 1952. Twenty-three years! How many people can honestly say their investment horizon is that long?

The Economist has just published a very interesting piece on equity returns that suggests the painfully slow post-Great Crash recovery is by no means a one-off event.  It describes the unshakable faith of the investment community in equities as a "shibboleth", by which it seems to mean a belief that nobody dares to challenge, but which in fact means (more appropriately, I'd say),  a long-standing belief now regarded as outmoded or no longer important.  (Definition from Wikipedia).

The Economist points out, as one example, that Japanese equities have never returned to the all-time peaks seen in 1989.  (That's almost to understate the case; the Nikkei average is well below even 50% of its 1989 peak).  In the US, from 1999 to the present day the return on equities has been 7.6 percentage points per year below the return on government bonds.

Remember "Dow 36000"?  That was the title of a book published back in the late 1990s, when the DJIA first traded above 12000, a level not a million miles from where it sits today.   One of the only two people to bother reviewing the book on Amazon described it as "a lot of padding around one big idea, and the idea's wrong", and hoped that not too many people would lose money by following the book's advice. You'd certainly have been better off following the advice of the reviewer, alas anonymous,  rather than that of the authors.  If you are interested in acquiring it as a historical artefact, or as a firestarter, there's a seller on Amazon anxious to send it to you in exchange for 30 pence.

The Economist ends its story with a stark message: "Equities are not a miracle asset that will turn measly contributions into a generous pension. Those who want to retire in comfort should save more".   Good advice, but almost certain to be ignored, especially in the UK, where most people still cling to the equally outmoded belief that property is the best pension plan.