Osakkeiden riskiensäilytyksen erojen tutkiminen

Title: What Price Risk? Unpacking the Equity Risk Premium URL Source: https://blogs.cfainstitute.org/investor/2024/04/24/what-price-risk-unpacking-the-equity-risk-premium/ Published Time: 2024-04-24T13:00:00+00:00 Markdown Content: Practical analysis for investment professionals About Us Authors Subscribe Explore Contribute Book Reviews EI Podcast mag-glass 24 April 2024 What Price Risk? Unpacking the Equity Risk Premium By Edward F. McQuarrie Posted In: Data-Driven Investor, Economics, Equity Investments, History & Geopolitics, Investment Topics Editors Note:This is the second in a series of articles that challenge the conventional wisdom that stocks always outperform bonds over the long term and that a negative correlation between bonds and stocks leads to effective diversification. In it, Edward McQuarrie draws from his research analyzing US stock and bond records dating back to 1792. CFA Institute Research and Policy Center recently hosted a panel discussion comprising McQuarrie,Rob Arnott,Elroy Dimson,Roger Ibbotson, andJeremy Siegel.Laurence B. Siegelmoderated. The webinar elicits divergent views on the equity risk premium and McQuarries thesis.Subscribe to Research and Policy Center, and you will be notified when the video airs. Edward McQuarrie: My inaugural post on the equity risk premium presented a new historical account of US stock and bond returns that tells a different, more nuanced story than the account offered by Siegel in his seminal book, Stocks for the Long Run, now in its 6th edition. This blog series stems from my Financial Analysts Journal article, Stocks for the Long Run? Sometimes Yes, Sometimes No, which is open for all to read on Taylor & Francis. A reader of my first post objected to my conclusions, arguing that the 19th century US data presented was just too far in the past to be meaningful to investors today. I anticipated that objection at the end of my last post. Here, I refute that notion with the help of recent international data. New International Data is Available When Siegel began his work in the early 1990s, international market history was more terra incognita than 19th century US market history. In recent years, Elroy Dimson and his colleagues have shed light on historical returns. In 2002, they published Triumph of the Optimists, an account of 15 markets outside the United States, replete with historical returns on stocks and bonds dating back to 1900. The Dimson-led effort was not the only expansion of the international record. Bryan Taylor at Global Financial Data, and Oscar Jorda and colleagues at macrohistory.net, have also developed historical databases of international returns, stretching back in some cases to the 1700s. Indeed, many financial historians, including William Goetzmann, Editor of the Financial Analysts Journal, have spent entire careers digging into historical data to extract insights that shape our evolving understanding of markets and their role in shaping society. A few years after Triumphs publication, the Dimson team began to update and expand their database on an annual basis, producing a series of yearbooks, most recently the 2024 edition. Along the way, theyve expanded the markets covered. Triumph had been criticized for survivorship bias, i.e., including only the markets that fared reasonably well and excluding markets that went bust, such as Russia in 2017 and those that fizzled, such as Austria after the war. Most important, the Dimson team began to calculate a world ex-US index of stock and bond performance, allowing a better assessment of the differences between US stock returns and returns elsewhere. None of this data had been compiled when Jeremy Siegel started out. I presented portions of it in my paper as an out-of-sample test of the Stocks for the Long Run thesis. The United States in Context The 120-year annualized real return on world stocks ex-US is now estimated by the Dimson team to be approximately 4.3%. Siegel estimated real long-term returns of 6% to 7%. That difference does not sound like much, but Dimson and colleagues note: A dollar invested in US equities in 1900 resulted in a terminal value of USD 1937 An equivalent investment in stocks from the rest of the world gave a terminal value of USD 179less than a tenth of the US value. We might say that international investors suffered a 90% shortfall in wealth creation. Regime Switching A key concept in my paper is the idea of regime switching, when asset returns fluctuate through phases that can last for decades. In one phase, bonds may perform terribly, as seen in the United States after World War II. In another phase, stocks may languish, as seen in the United States before the Civil War. Because returns are not stationary in character, it may not be useful to calculate asset returns over centuries and sum these up by offering one single number. In my view, theres too much variance for one number to offer investors meaningful guidance, or to set expectations for what might happen over their unique horizons. The Range of Returns: the Good, the Bad, and the Ugly Here is an analogy to highlight the problem. Lets say that the 100 students who attended my lecture this morning had their shoes ruined. The carpet cleaner last night used a solvent rather than the intended cleaning solution. This caused the carpet to lift in patches, which bonded to the students shoe soles. The University wishes to make amends by purchasing a new pair of shoes for each student. As an academic educated in statistics, I suggest to administrators that they simplify their task by buying 100 pairs of shoes all in the average shoe size, because the mean gives the best linear unbiased estimate. How many students will be happy with their new shoes? Returning to market history, what investors need to understand is the range of returns, not the all-sample average. Investors need to grasp how much returns can vary over long time horizons that correspond to the periods over which they might seek to accumulate wealth, such as 10-, 20-, 30-, or 50-year spans. The accepted approach for doing so is to calculate rolling returns. Thus, we can look at the set of 20-year returns: 1900 to 1919 inclusive, 1901 to 1920, 1902 to 1921, etc. Rolls allow us to examine how investors fared across all available starting points: the good, the bad, and the ugly. In my paper I looked at 20-, 30-, and 50-year returns for 19 markets outside the US, using data as far back as were available. First, however, we need to deal with an objection that quickly arises when international returns are compiled: many nations outside the US suffered grievously during war time. Some were defeated and their economies destroyed. Others were invaded and occupied with accompanying economic and cultural devastation. And others dissolved into civil war. As a US investor in the 21st century, I dont believe that returns in those nations during those periods are relevant to my investment planning. If the United States gets invaded and occupied in the late 2020s, Ill have other things to worry about than my portfolio. My solution was to exclude from the sample the rolls for war-torn nations and periods. For Belgium, for example, I removed 20-year rolls that included 1914 to 1918 and 1941 to 1945. By contrast, I didnt remove any rolls for the United Kingdom because, however costly wartime was to that nation, it did not suffer invasion or occupation. Again, the purpose here is to test two theses derived from Stocks for the Long Run on World ex-US stocks: Among intact nations outside of wartime, for holding periods of 20 years or more, real stock returns will be approximately 6% to 7% per annum. There wont be any 20-year holding periods in which government bonds outperformed stock. The equity premium will stay close to the value of 300 basis points to 400 basis points. I was able to decisively reject the first thesis. Table 1 illustrates the worst-case outcomes over 20-, 30-, and 50-year rolls. Table 1: Worst Multi-Decade International Stock Returns Excluding War Losses Nation 20 years Ending in: Nation 30 years Ending in: Nation 50 years Ending in: Italy -7.34 1979 Norway -4.40 1978 Italy -0.54 2011 Norway -5.92 1977 Italy -2.35 1991 Norway 0.43 1995 Sweden -5.17 1932 Portugal -1.64 1949 Austria 1.10 1996 Japan -5.02 2009 Sweden -1.10 1932 Sweden 1.61 1948 Switzerland -4.39 1981 Austria -1.02 1976 Belgium 2.04 1908 Austria -4.26 1981 Switzerland -0.78 1991 Spain 2.34 2020 Spain -3.36 1983 Japan -0.78 2019 Switzerland 2.41 2011 France -2.98 1981 Portugal -2.34 1939 South Africa -1.40 1920 UK -1.27 1920 Belgium -1.27 1976 Germany -1.20 1980 Note: Table shows all negative 20- and 30-year returns found, and all 50-year returns less than 2.5%. Annualized real percentage returns. Rolls calculated by Bryan Taylor using Global Financial Data series, as shared with me in Spring 2021. As you can see, negative returns over two decades are easily found, and not uncommon over 30-year periods. For context, a 5% annualized decline over 20 years turns $10,000 into $3,585, a wealth loss of nearly 65%. And a 2% annualized decline over 30 years leaves $5,455 in wealth, a loss of about 45%. Stocks are indeed risky, regardless of the holding period. Looking outside the United States in the 20th century and getting better data on the United States in the 19th century allowed me to confirm this fact. I was also able to decisively reject the second thesis. The international record provides many examples of lengthy holding periods in which bonds outperformed stocks, just as I found for US stocks in the 19th century. Table 2: Lowest Equity Premia Observed Internationally 20 years Ending in: 30 years Ending in: 50 years Ending in: Australia -1.98 2008 -0.64 2016 1.48 2019 Austria -8.50 1943 -5.05 1953 -2.46 2011 Belgium -4.21 1948 -1.73 1886 -1.69 1886 Canada -5.41 1886 -3.06 1884 -0.56 1902 Denmark -5.28 1932 -3.95 1946 -2.80 1932 Finland -3.26 2019 1.64 2018 3.57 1967 France -3.03 1821 -2.93 1831 0.27 2011 Germany -3.90 1980 -1.47 2002 -0.99 2011 Italy -5.10 1979 -4.56 2016 -2.99 2011 Japan -9.10 2009 -3.85 2019 -1.41 2011 Netherlands -6.10 1932 -2.26 1934 1.09 1950 New Zealand -6.19 2006 -4.35 2016 0.37 1952 Norway -10.03 1938 -7.46 1947 -4.49 1967 Portugal -8.18 1993 -6.26 2003 -2.26 2014 South Africa -3.03 1985 -1.43 1985 0.61 1932 Spain -5.63 1920 -4.25 1915 -3.38 1936 Sweden -8.08 1932 -3.29 1932 -0.74 1932 Switzerland -1.18 1974 -0.66 1991 0.78 2011 UK -1.52 1939 -1.14 1849 -0.16 1759 Deficit in: 19/19 18/19 12/19 Note: Data from GFD except Portugal from Jorda et al. (2019). Shaded cells include years where the nation was defeated in war, suffered civil war, or was invaded and occupied. These periods are included here but not in Table 1 because both bonds and stocks should suffer under wartime devastation. Its clear that stocks are riskier than bonds, and that risk does not disappear when the holding period extends to 20 years or more. Because stocks remain risky regardless of the holding period, stocks often outperform, because investors get compensated for taking that risk. Stocks are a good wager over the long term, on favorable odds. But stocks remain a bet, one that can go bad for any randomly selected investor over their personal time horizon. Understanding this allows us to manage regret risk. My next post in this series will address common misperceptions of my new research. McQuarrie wants me to sell stocks and buy bonds, for example. Nope. If you liked this post, dont forget to subscribe to theEnterprising Investor. All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the authors employer. Professional Learning for CFA Institute Members CFA Institute members are empowered to self-determine and self-report professional learning (PL) credits earned, including content onEnterprising Investor. Members can record credits easily using theironline PL tracker. Tags: dividends, equities, equity risk premium, Financial History, investing Share On Facebook X LinkedIn E-Mail About the Author(s) Edward F. McQuarrie Edward F. McQuarrie, Ph.D., is Professor Emeritus at the Leavey School of Business at Santa Clara University. After retiring from Santa Clara in 2016, he pursued new research interests in financial market history and retirement income planning. Projects under way include errors of estimate in historical index returns, the fitful nature of size and value effects, fluctuations in the corporate bond premium, the annuity wager, and payoff analyses for Roth conversions. Working papers describing his research in progress can be downloaded at https://ssrn.com/author=340720. For more information, visit his website at edwardfmcquarrie.com. He posts regularly at bogleheads.org and occasionally at medium.com. Leave a Reply Your email address will not be published. Required fields are marked * Comment * Name * Email * Website Save my name, email, and website in this browser for the next time I comment. About CFA Institute CFA Institute is the global, not-for-profit association of investment professionals that awards the CFA and CIPM designations. We promote the highest ethical standards and offer a range of educational opportunities online and around the world. 2025 CFA Institute. All rights reserved. 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Title: What Price Risk? Unpacking the Equity Risk Premium

URL Source: https://blogs.cfainstitute.org/investor/2024/04/24/what-price-risk-unpacking-the-equity-risk-premium/

Published Time: 2024-04-24T13:00:00+00:00

Markdown Content:
Practical analysis for investment professionals
About Us
 
Authors
 
Subscribe
 
Explore
 
Contribute
 
Book Reviews
 
EI Podcast
mag-glass
24 April 2024
What Price Risk? Unpacking the Equity Risk Premium
By Edward F. McQuarrie
Posted In: Data-Driven Investor, Economics, Equity Investments, History & Geopolitics, Investment Topics

Editors Note:This is the second in a series of articles that challenge the conventional wisdom that stocks always outperform bonds over the long term and that a negative correlation between bonds and stocks leads to effective diversification. In it, Edward McQuarrie draws from his research analyzing US stock and bond records dating back to 1792.

CFA Institute Research and Policy Center recently hosted a panel discussion comprising McQuarrie,Rob Arnott,Elroy Dimson,Roger Ibbotson, andJeremy Siegel.Laurence B. Siegelmoderated. The webinar elicits divergent views on the equity risk premium and McQuarries thesis.Subscribe to Research and Policy Center, and you will be notified when the video airs.

Edward McQuarrie:

My inaugural post on the equity risk premium presented a new historical account of US stock and bond returns that tells a different, more nuanced story than the account offered by Siegel in his seminal book, Stocks for the Long Run, now in its 6th edition.

This blog series stems from my Financial Analysts Journal article, Stocks for the Long Run? Sometimes Yes, Sometimes No, which is open for all to read on Taylor & Francis.

A reader of my first post objected to my conclusions, arguing that the 19th century US data presented was just too far in the past to be meaningful to investors today.

I anticipated that objection at the end of my last post. Here, I refute that notion with the help of recent international data.

New International Data is Available

When Siegel began his work in the early 1990s, international market history was more terra incognita than 19th century US market history. In recent years, Elroy Dimson and his colleagues have shed light on historical returns. In 2002, they published Triumph of the Optimists, an account of 15 markets outside the United States, replete with historical returns on stocks and bonds dating back to 1900.

The Dimson-led effort was not the only expansion of the international record. Bryan Taylor at Global Financial Data, and Oscar Jorda and colleagues at macrohistory.net, have also developed historical databases of international returns, stretching back in some cases to the 1700s.

Indeed, many financial historians, including William Goetzmann, Editor of the Financial Analysts Journal, have spent entire careers digging into historical data to extract insights that shape our evolving understanding of markets and their role in shaping society.

A few years after Triumphs publication, the Dimson team began to update and expand their database on an annual basis, producing a series of yearbooks, most recently the 2024 edition. Along the way, theyve expanded the markets covered.

Triumph had been criticized for survivorship bias, i.e., including only the markets that fared reasonably well and excluding markets that went bust, such as Russia in 2017 and those that fizzled, such as Austria after the war.

Most important, the Dimson team began to calculate a world ex-US index of stock and bond performance, allowing a better assessment of the differences between US stock returns and returns elsewhere.

None of this data had been compiled when Jeremy Siegel started out. I presented portions of it in my paper as an out-of-sample test of the Stocks for the Long Run thesis.

The United States in Context

The 120-year annualized real return on world stocks ex-US is now estimated by the Dimson team to be approximately 4.3%. Siegel estimated real long-term returns of 6% to 7%. That difference does not sound like much, but Dimson and colleagues note: A dollar invested in US equities in 1900 resulted in a terminal value of USD 1937  An equivalent investment in stocks from the rest of the world gave a terminal value of USD 179less than a tenth of the US value.

We might say that international investors suffered a 90% shortfall in wealth creation.

Regime Switching

A key concept in my paper is the idea of regime switching, when asset returns fluctuate through phases that can last for decades. In one phase, bonds may perform terribly, as seen in the United States after World War II. In another phase, stocks may languish, as seen in the United States before the Civil War.

Because returns are not stationary in character, it may not be useful to calculate asset returns over centuries and sum these up by offering one single number. In my view, theres too much variance for one number to offer investors meaningful guidance, or to set expectations for what might happen over their unique horizons.

The Range of Returns: the Good, the Bad, and the Ugly

Here is an analogy to highlight the problem. Lets say that the 100 students who attended my lecture this morning had their shoes ruined. The carpet cleaner last night used a solvent rather than the intended cleaning solution. This caused the carpet to lift in patches, which bonded to the students shoe soles. The University wishes to make amends by purchasing a new pair of shoes for each student.

As an academic educated in statistics, I suggest to administrators that they simplify their task by buying 100 pairs of shoes all in the average shoe size, because the mean gives the best linear unbiased estimate.

How many students will be happy with their new shoes?

Returning to market history, what investors need to understand is the range of returns, not the all-sample average. Investors need to grasp how much returns can vary over long time horizons that correspond to the periods over which they might seek to accumulate wealth, such as 10-, 20-, 30-, or 50-year spans.

The accepted approach for doing so is to calculate rolling returns. Thus, we can look at the set of 20-year returns: 1900 to 1919 inclusive, 1901 to 1920, 1902 to 1921, etc. Rolls allow us to examine how investors fared across all available starting points: the good, the bad, and the ugly. In my paper I looked at 20-, 30-, and 50-year returns for 19 markets outside the US, using data as far back as were available.

First, however, we need to deal with an objection that quickly arises when international returns are compiled: many nations outside the US suffered grievously during war time. Some were defeated and their economies destroyed. Others were invaded and occupied with accompanying economic and cultural devastation. And others dissolved into civil war.

As a US investor in the 21st century, I dont believe that returns in those nations during those periods are relevant to my investment planning. If the United States gets invaded and occupied in the late 2020s, Ill have other things to worry about than my portfolio.

My solution was to exclude from the sample the rolls for war-torn nations and periods. For Belgium, for example, I removed 20-year rolls that included 1914 to 1918 and 1941 to 1945. By contrast, I didnt remove any rolls for the United Kingdom because, however costly wartime was to that nation, it did not suffer invasion or occupation.

Again, the purpose here is to test two theses derived from Stocks for the Long Run on World ex-US stocks:

Among intact nations outside of wartime, for holding periods of 20 years or more, real stock returns will be approximately 6% to 7% per annum.
There wont be any 20-year holding periods in which government bonds outperformed stock. The equity premium will stay close to the value of 300 basis points to 400 basis points.

I was able to decisively reject the first thesis. Table 1 illustrates the worst-case outcomes over 20-, 30-, and 50-year rolls.

Table 1: Worst Multi-Decade International Stock Returns Excluding War Losses

Nation	 20 years	Ending in:	 Nation	 30 years	Ending in:	 Nation	 50 years	Ending in:
Italy	-7.34	1979	Norway	-4.40	1978	Italy	-0.54	2011
Norway	-5.92	1977	Italy	-2.35	1991	Norway	0.43	1995
Sweden	-5.17	1932	Portugal	-1.64	1949	Austria	1.10	1996
Japan	-5.02	2009	Sweden	-1.10	1932	Sweden	1.61	1948
Switzerland	-4.39	1981	Austria	-1.02	1976	Belgium	2.04	1908
Austria	-4.26	1981	Switzerland	-0.78	1991	Spain	2.34	2020
Spain	-3.36	1983	Japan	-0.78	2019	Switzerland	2.41	2011
France	-2.98	1981						
Portugal	-2.34	1939						
South Africa	-1.40	1920						
UK	-1.27	1920						
Belgium	-1.27	1976						
Germany	-1.20	1980

Note: Table shows all negative 20- and 30-year returns found, and all 50-year returns less than 2.5%. Annualized real percentage returns. Rolls calculated by Bryan Taylor using Global Financial Data series, as shared with me in Spring 2021.

As you can see, negative returns over two decades are easily found, and not uncommon over 30-year periods. For context, a 5% annualized decline over 20 years turns $10,000 into $3,585, a wealth loss of nearly 65%. And a 2% annualized decline over 30 years leaves $5,455 in wealth, a loss of about 45%.

Stocks are indeed risky, regardless of the holding period. Looking outside the United States in the 20th century and getting better data on the United States in the 19th century allowed me to confirm this fact.

I was also able to decisively reject the second thesis. The international record provides many examples of lengthy holding periods in which bonds outperformed stocks, just as I found for US stocks in the 19th century.

Table 2: Lowest Equity Premia Observed Internationally

20 years	Ending in:	30 years	Ending in:	50 years	Ending in:
 Australia	-1.98	2008	-0.64	2016	1.48	2019
Austria	-8.50	1943	-5.05	1953	-2.46	2011
Belgium	-4.21	1948	-1.73	1886	-1.69	1886
Canada	-5.41	1886	-3.06	1884	-0.56	1902
Denmark	-5.28	1932	-3.95	1946	-2.80	1932
Finland	-3.26	2019	1.64	2018	3.57	1967
France	-3.03	1821	-2.93	1831	0.27	2011
Germany	-3.90	1980	-1.47	2002	-0.99	2011
Italy	-5.10	1979	-4.56	2016	-2.99	2011
Japan	-9.10	2009	-3.85	2019	-1.41	2011
Netherlands	-6.10	1932	-2.26	1934	1.09	1950
New Zealand	-6.19	2006	-4.35	2016	0.37	1952
Norway	-10.03	1938	-7.46	1947	-4.49	1967
Portugal	-8.18	1993	-6.26	2003	-2.26	2014
South Africa	-3.03	1985	-1.43	1985	0.61	1932
Spain	-5.63	1920	-4.25	1915	-3.38	1936
Sweden	-8.08	1932	-3.29	1932	-0.74	1932
Switzerland	-1.18	1974	-0.66	1991	0.78	2011
UK	-1.52	1939	-1.14	1849	-0.16	1759
Deficit in:	19/19		18/19		12/19

Note: Data from GFD except Portugal from Jorda et al. (2019). Shaded cells include years where the nation was defeated in war, suffered civil war, or was invaded and occupied. These periods are included here but not in Table 1 because both bonds and stocks should suffer under wartime devastation.

Its clear that stocks are riskier than bonds, and that risk does not disappear when the holding period extends to 20 years or more.

Because stocks remain risky regardless of the holding period, stocks often outperform, because investors get compensated for taking that risk. Stocks are a good wager over the long term, on favorable odds. But stocks remain a bet, one that can go bad for any randomly selected investor over their personal time horizon. Understanding this allows us to manage regret risk.

My next post in this series will address common misperceptions of my new research. McQuarrie wants me to sell stocks and buy bonds, for example. Nope.

If you liked this post, dont forget to subscribe to theEnterprising Investor.

All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the authors employer.

Professional Learning for CFA Institute Members

CFA Institute members are empowered to self-determine and self-report professional learning (PL) credits earned, including content onEnterprising Investor. Members can record credits easily using theironline PL tracker.

Tags: dividends, equities, equity risk premium, Financial History, investing

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About the Author(s)
Edward F. McQuarrie

Edward F. McQuarrie, Ph.D., is Professor Emeritus at the Leavey School of Business at Santa Clara University. After retiring from Santa Clara in 2016, he pursued new research interests in financial market history and retirement income planning. Projects under way include errors of estimate in historical index returns, the fitful nature of size and value effects, fluctuations in the corporate bond premium, the annuity wager, and payoff analyses for Roth conversions. Working papers describing his research in progress can be downloaded at https://ssrn.com/author=340720. For more information, visit his website at edwardfmcquarrie.com. He posts regularly at bogleheads.org and occasionally at medium.com.

Transcript for:Osakkeiden riskiensäilytyksen erojen tutkiminen

Transcript for:
Osakkeiden riskiensäilytyksen erojen tutkiminen