From the economist and Nobel laureate Eugene Fama we know: "No one is smarter than the market." Since the 1960s, first he and then many of his students have demonstrated again and again that no forecast-driven fund manager can beat the market over the long term. This insight has contributed to the strong rise in the popularity of ETFs and index funds – which track market performance exactly – in recent years. quirion's concept, too, is based on Fama's findings and relies on selected ETFs and index funds to invest in the two most important asset classes – equities and bonds – to invest in.
That this strategy pays off over the long term has been confirmed by economist Moritz Schularick with the help of an extensive data analysis in a recent study. The professor of macroeconomics at the University of Bonn compiled the returns of the most important capital investments for 16 industrialized nations since 1870 and compared their inflation-adjusted real gains. The study, titled "The Rate of Return on Everything," ends with the data for 2015. Here are the most important findings at a glance:
Surprising for many is likely to be the finding that the returns of supposedly safe investments have also been subject to strong fluctuations over the decades – in some cases these were even higher than those of seemingly risky bonds. Above all, the study dispels the assumption that today's persistently low interest rates and returns are an exception. Both World Wars saw moments with very low safe returns in negative territory. So did the inflation and growth crises of the 1970s. For the study's authors, it is rather puzzling why safe returns were so high in the mid-1980s – back then, German federal savings bonds yielded up to ten percent – and not why they have declined since. Over the long term, the returns of safe assets fluctuate more around today's level. On average, the return on bonds is 2.5 percent, and on money-market bonds one percent.
"Investing your wealth in a variety of equities pays off over the long term."
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"No reliable forecasts for future returns can be derived from past returns."
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Low barrier, high return
Worth noting: no reliable forecasts for future returns can be derived from past returns. This also applies to the following look at the equity and real estate markets. Measured by total returns, residential real estate and equities show very similar and high real gains, averaging around 7.5 percent per year. However, the authors also point out that real estate is far harder to diversify than equities. In addition, buying real estate requires a high capital outlay, at least for private individuals. The barrier to entering the equity market is lower.
Overall, the analysis shows that the returns of risky investments over the past four decades have remained relatively constant, while safe returns have continued to fall. It's also interesting that the influence of central banks on interest rates is, over the long term, far smaller than many traditional economists, as well as numerous financial market participants or the media, assume. Ultimately, the study proves what every good financial expert recommends and what quirion, too, makes the foundation of its investment concept: spreading your wealth while including equities pays off in the long run.
