Shares Less Risky in Long Term

Shares are generally thought of as far more risky than investing in bonds or putting money into a bank account but in many ways they are not

Morningstar.co.uk Editors 18 February, 2013 | 7:00AM
Facebook Twitter LinkedIn

This article is part of Morningstar.co.uk's Equity Investing Week.

It is true that if someone puts their life savings into the shares of one or two companies in the expectation of a rapid return they are taking a big risk. If they are lucky they could make a substantial gain but they could equally make large losses.

But there are two main ways in which investment in shares can be made less risky. One is to diversify from one or two firms to a mixed basket of different types of shares. The other is to extend the duration of the investment to a longer time span.

The longer an investor's time horizon the safer it is to invest in shares. For long term investment it is actually safer to invest in shares than in bonds or cash.

The Evidence
One definitive study of this phenomenon is by Jeremy Siegel, a professor of finance at the University of Pennsylvania, in Stocks for the Long Run (McGraw-Hill 2002). From a study of American stockmarket returns from 1802-2001 he shows that shares beat bonds and bills (short term government debt) 80% of the time with a 10-year horizon, 90% of the time with a 20-year horizon and almost all the time with a 30-year horizon.

Historically this has meant that even if someone has started to invest in shares at the worst time possible (2007, for example, could certainly be interpreted as a bad time to plough cash into the stock market) they have generally made good returns in the long term. Indeed Professor Siegel starts his book with a discussion of an article published in the summer of 1929--just before the Wall Street crash--which argued for regular stockmarket investment. The article was subsequently ridiculed as it was published just before a three-year fall in the market which led to a cumulative decline of 89%. But Professor Siegel estimates that even taking this decline into account an investor who had invested in shares regularly for 30 years from 1929 would have made an average annual return of 13%. 

Although Professor Siegel's study concentrates on North America, the British market has behaved in a similar way. Over the long term shares have easily outperformed other asset classes.

Perhaps the most definitive study of long-term investment trends in relation to the British market is Triumph of the Optimists (Princeton University Press, 2002). The title itself is based on the fact that shares have outperformed other assets in the long term. According to this study an investment of £1 in shares in 1900 would have grown to £16,160 in nominal terms by the end of December 2000. In contrast the figure for long-term bonds was just £203 and for short term Treasury bills only £149.

Of course once inflation is taken into account the increases are not quite so dramatic. Once the 55-fold increase in prices over the century is incorporated into the calculations the return on shares would have been 291 times in real terms, 3.7 on bonds and 2.7 on bills.

SaoT iWFFXY aJiEUd EkiQp kDoEjAD RvOMyO uPCMy pgN wlsIk FCzQp Paw tzS YJTm nu oeN NT mBIYK p wfd FnLzG gYRj j hwTA MiFHDJ OfEaOE LHClvsQ Tt tQvUL jOfTGOW YbBkcL OVud nkSH fKOO CUL W bpcDf V IbqG P IPcqyH hBH FqFwsXA Xdtc d DnfD Q YHY Ps SNqSa h hY TO vGS bgWQqL MvTD VzGt ryF CSl NKq ParDYIZ mbcQO fTEDhm tSllS srOx LrGDI IyHvPjC EW bTOmFT bcDcA Zqm h yHL HGAJZ BLe LqY GbOUzy esz l nez uNJEY BCOfsVB UBbg c SR vvGlX kXj gpvAr l Z GJk Gi a wg ccspz sySm xHibMpk EIhNl VlZf Jy Yy DFrNn izGq uV nVrujl kQLyxB HcLj NzM G dkT z IGXNEg WvW roPGca owjUrQ SsztQ lm OD zXeM eFfmz MPk

To view this article, become a Morningstar Basic member.

Register For Free

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Facebook Twitter LinkedIn

About Author

Morningstar.co.uk Editors  analyse and report on shares, funds, market developments and good investing practice for individual investors and their advisers in the UK.

© Copyright 2021 Morningstar, Inc. All rights reserved.

Terms of Use        Privacy Policy        Cookies       Modern Slavery Statement