(February 13, 2014) — Investors who chose not to invest in US securities over the last 114 years would have made around 50% less than their peers who embraced the American Dream, research by London Business School has found.
Over the course of the last century and the start of this one, a globally diversified, reinvested portfolio grew by a factor of 313.5, compared to a portfolio without US securities that grew by just 156.6, both in US dollar terms.
The reason behind the massive drop once US stocks were removed is due to the size of the market and therefore the skewing of performance. The academics said that US stocks made up around half of the market capitalisation of its index, dominating the other 22 countries.
A reinvested portfolio of just US equities grew by a factor of 1,248 over the 114 years, London Business School said, but warned that splitting out the US’ performance is an important exercise for investors.
“There is an obvious danger of placing too much reliance on the excellent long-run past performance of US stocks,” the academics said. “The New York Stock Exchange traces its origins back to 1792. At that time, the Dutch and UK stock markets were already nearly 200 and 100 years old respectively. Thus, in just a little over 200 years, the USA has gone from zero to almost a one-half share of the world’s equity markets.”
The “extrapolating from such a successful market can lead to ‘success’ bias. Investors can gain a misleading view of equity returns elsewhere, or of future equity returns for the US itself.
Looking at the bond market, the US also performed well. A globally diversified portfolio grew by a factor of 7.6, compared with a 5.8 rate for the index that ignored the US. The US bond portfolio grew by 8.2 over the 114 years.
Europe, by comparison, saw a diversified, reinvested equity portfolio grow by a factor of 137, with bond holdings growing by just 3.5 in US dollar terms across the 114 years.
The research appeared in the Global Investment Returns Yearbook 2014, which is produced in conjunction with Credit Suisse.