A long-term investment? Here’s what you could buy..

Buying your home as a long-term investment is not necessarily the best bet you can make, as many believe, with stocks offering far better returns over the long term according to research from global bank Credit Suisse.

In a study of data stretching back 118 years, researchers found that despite the widely held belief that property offers the best and most reliable returns, the housing sector globally has actually returned a ‘quality-adjusted real capital gain’ of approximately –2.1 per cent per year.

By this measure stock markets beat the likes of property, bonds and cash hands down through the years.

The quality-adjusted real capital gain measurement used in the report produces return figures with the impact of inflation and variation in housing quality accounted for, and can produce very different results from a flat measure of returns.

The ‘Global Investment Yearbook 2018’, was produced by the Credit Suisse Research Institute with authors from the London Business School and aims to provide an in-depth and long-term look at investment returns.

In the UK, between 1900 and 2017, investing in the stock market would have netted an annualised return of 5.5 per cent while house prices saw increases of 1.8 per cent a year.

UK bonds returned 1.8 per cent and ‘bills’ – essentially cash – returned 1 per cent a year.

To push home its point, the team reveal that in the US house prices fell by more than 36 per cent in real terms between 2005 and 2012.

The stock market returns do include reinvested dividends, but the house price gains do not account for any potential returns from property rental income making it hard to judge how returns from a buy-to-let property could differ.

Including rental income in the calculations would be difficult, the authors say, due to the lack of reliable data stretching back 100 years and the ‘impossible’ task of then matching potential rental income with the properties included in the pricing index.

Overall, the report insists residential property would not offer premium returns in the long term.

‘Residential property should not be purchased with an exaggerated expectation of a large risk premium. It is equity assets that provide an expected reward for risk. The real case for equities is that, over the long term, stockholders have enjoyed a large equity risk premium,’ the report said.

In the US, investing in stocks produced annualised returns of 9.6 per cent a year between 1900 and 2017.

Bonds returned 4.9 per cent on an annualised basis, bills 3.7 per cent and inflation averaged at 2.9 per cent a year over the same period.

This was reflected around the world, with equity returns since 1900 coming at between 3 and 6 per cent in every location the authors examined.

‘Equities were the best-performing asset class everywhere,’ the report said, while bonds beat bills in every country except Portugal.

‘This overall pattern, of equities beating bonds and bonds beating bills, is precisely what we would expect over the long haul, since equities are riskier than bonds, while bonds are riskier than cash,’ it added.

With volatility returning to global markets after a prolonged period of calm, Credit Suisse research institute’s Richard Kersley said the report was of ‘heightened relevance’ to understand where the best returns come from.

Traditionally viewed as ‘safe’ assets, precious metals such as gold, silver and diamonds were found to be less of haven than many think and did not offer good protection against inflation with the metals producing a lower return than US treasury bills over the long term.

UHNWI (Ultra High Net Worth Investors) have a quarter of all their wealth in financial assets


This chart shows stocks (blue bar) offered far higher returns in every country the study examined with bonds and bills even producing negative returns in Italy, Germany and Japan

Away from the likes of stocks, bonds and gold, some investors may have punted on the fact a collection of fine wines or postage stamps may offer superior returns over the long-run.

The study found that out of the four collectible items with figures dating back to 1900 – wine, art, stamps and violins – wine performed best with prices appreciating 3.7 per cent a year. Art performed the worst since 1900 with prices rising just 1.9 per cent a year, more in line with the returns offered by global bonds.

Again, equities outperformed any holdings of rare collectibles on a general basis.

In a world of rock bottom interest rates, the report’s authors expect returns across all asset classes will likely remain lower in future.

‘When real interest rates are low, as they are today, subsequent returns tend to be lower,’ the report said.

In these 11 countries, housing has increased in value by 1.3 per cent a year – far below the returns offered by equities over the same period – but can stock returns continue to beat cash and property in the future?

The authors Professors Elroy Dimson and Paul Marsh, and Dr Mike Staunton, predict the margin by which equities are likely to outperform cash in future will be lower than the 118-year historical premium of 4.3 per cent a year. Their long run forecast is 3.5 per cent.

However, even with a lower future equity premium, equities are still expected to double relative to cash over a 20-year period

The authors said: ‘The importance of a long-term view when seeking to understand the nature of risk and return in the world’s markets remains. Over the long run, equity returns still dominate bond and bill returns.’

Source Credit: Daily Mail