The source of these figures is from Andex Charts Pty Ltd and represent accumulation (income plus growth added), assuming all income is reinvested. The international shares source is MSCI. If you want to get a whole booklet on this sort of stuff, phone Vanguard on 1300 655 101 and ask for every book in the "Plain Talk Library", the book I pinched this data from is "Realistic Expectations for share market returns".

One thing you should note about these figures is that these are indexes, mathematical abstractions that are only approximately imitable for an actual investor out here in the world of slippage, MERs, taxes and commissions. Of these, shares are the most tax efficient investment class, then real estate, and then cash and bonds which are inefficient from a tax point of view. In particular people may find the high returns of listed property rather surprising, however in another Vanguard document, their prospectus, they show the rather dismal truth about managed funds. Only a small proportion of any shares funds ever outperform indexes after fees and taxes, for property there are such high management expenses that no property funds outperform the broad property indexes, cash and bond funds also are notorious for underperforming their own indexes.

A somewhat longer term look at investments is found in David Dreman's Contrarian Investment Strategies: The Next Generation (pg 281) The following table shows how each of these asset classes have returned (at least in the United States) in real (inflation adjusted, but not taxed) terms.

• All returns are averages for the period.
• "Nominal yield" is the mean annual treasury bill (short term government debt) return before inflation.
• "Inflation" is the average increase in the Consumer Price Index.
• Data: All data 1802 - 1945 and Gold data 1802 - 1995: Jeremy Siegel. All other data 1946 - 1996: Dreman Foundation.
• Note that these are taken from an American book, but the relative returns are broadly similar for Australia.

Up until the second world war, inflation was a non-factor in markets. The 1940 US dollar, for example, still held 88% of the purchasing power of the greenback in 1802. Since the second world war inflation has averaged over 4% a year, over 15 times the rate of the previous 143 years. This changes everything about long term investment. Until the 20th century inflation didn't matter, so bonds were an acceptable and prudent investment. Back at that time also stock markets were very poorly regulated compared today and stocks gained a reputation for being highly speculative compared to their "safe" alternatives.

Today it is virtually impossible to make a profit in anything except real estate and stocks over long periods. You pay tax on your income from bonds and bills and then get to spend or reinvest a sum that before tax was paid was only marginally in front of inflation. Take out tax and inflation and you get a very different perception of "risk". Is a bond a safe investment if you are 100% absolutely guaranteed to exit your investment with less spending power than what you originally put in? Is the purpose of investment not to at least maintain the spending power of your money, even if you can't grow it? Here is a place where conventional wisdom is truly obsolete. Stocks attained a reputation for speculative risk at a time when inflation and taxes were negligible and markets were subject to flagrant abuse and manipulation. Bonds got their reputation for being safe at the same time. Things are different now because of inflation and taxes, and the change is so fundamental that it has turned the whole situation around, now you take massive risk when you buy bonds, they only perform well when interest rates fall, relying on this particular outlook seems very speculative to me, it is certain that interest rates will not fall forever.

Another study, performed by the London Business School (and sponsored by ABN AMRO) looked at the long term performance of most of the world's markets.

This study found a few interesting things, for a start the Australian market has been one of the top performers since 1900, beating the United States and United Kingdom, the Australian stock market has over the last hundred years averaged 7.5%pa returns.

One dollar invested in Australian shares in 1900 would be $91,082 today, or $1,487 if you adjust for inflation.

The study found that for rolling two year periods, two years of consecutive negative performance occurred 16% of the time. On the other hand they found that a third year of negative performance was much rarer, occurring only 6% of the time.

The authors of this study also found that over 20 year periods stocks did not always outperform bonds. Although in the USA and UK it is true that stocks have outperformed bonds in every 20 year period, for some other markets this was not the case.

It is extremely difficult to forecast the market, but this doesn't mean it is entirely efficient. It doesn't mean that buying and holding index funds is the be-all and end-all of investing. Most people choose funds based on recent outperformance of the averages, they buy things because they think managers or stocks have momentum that will sweep along all with it in a tide of good fortune. One technique that has been around for decades has been contrarian investing, which is the exact opposite of how most people invest. It is perverse because it involves buying things just because they are lousy. There are very few people with the courage to buy the worst sectors (note, this is different to buying the worst stocks, if you buy severely underperforming stocks you will do badly, as O'Shaughnessey found in "What Works on Wall Street").

The following tables represent what would have happened if you had invested $100,000 on the last trading day of 1981 in the asset class that had the best performance in the previous 12 months (left column) and what would have happened if instead you had invested $100,000 in the worst performing asset class of the previous 12 months, continuing this strategy over the next 15 years by moving the portfolio at the end of each 12 month period into the best or worst asset class of the previous year.

So if you were a "chaser", one who always got in late and invested in the category that did the best over the last 12 months, you would have done substantially worse than someone who was a contrarian investor, who invested in the worst investment from the previous year. You may note also that, at least in this particular 19 year time frame, investing in last years stars led to fairly volatile returns, some big ups that largely came over only a few years late in the time period but also many down years. The contrarian strategy was substantially less volatile, though it got off to a bad start in the early 80s when it had investors in Australian stocks in 1982, leading to a 14% loss, however the 67% rally in Australian stocks the next year would have gone some way to providing consolation. I did see however that the contrarian strategy would have kept you in cash a lot, long term investors don't really have much interest in investing in cash unless they are really bearish for some reason, so I thought I might crunch the numbers to see how one might have done by investing in the dogs from the three growth assets, investing in the worst performing investment class from the previous 12 months out of Australian and International Shares and Property trusts.

The result? Slightly worse than if cash and bonds had been included as options, because it got off to a bad start at a time when interest rates were very high. Setting a cutoff might do it, if you say investing in cash and bonds is ok when interest rates are above 10%. How did the latter modification work out? Of all the strategies I tested, this was the most successful, beating International Equities by a large margin.

Have a look at the Excel spreadsheet that I made up. It contains the returns of each type of asset mentioned here. I also have the numbers for each of the strategies I have talked about, including the CAPM derived results used by financial planners. It completely ignores trading expenses and taxes of course, but as you can see, by adopting a contrarian strategy you would have ended up a much larger account than if you had kept to only one asset class, including the MSCI index.

Before contrarians get too cocky though thinking that this somehow approaches a perfect timing strategy, if you look toward the end of the spreadsheet you'll see how much better you would have done if you had managed to always choose the best asset class to be in each year, the results are substantially higher than even contrarian investing. To reassure really nervous investors though, you can also see that if you had invested for the period in the absolute worst market each year, you would have broken even in the long term (before taxes and inflation anyway, which would in reality have given you a loss). This is probably why the "time in, not timing" idea has taken hold. Even really bad investors can do reasonably well if they are into diversified investments for the long term. Clearly being in markets for the long term is not particularly risky, if this is the worst you could have done. It is interesting to note that even though the worst possible strategy performed really really badly, it is "low risk" because volatility was low. Compare that to the returns of going with the best asset class each year, much higher volatility... therefore high risk. The assumption that volatility is risk and that you can reduce risk by lowering volatility would have put you into substantially worse performing asset classes if somehow volatility was predictive of something. In this case, aversion to volatility would have put you into riskier investments.

Click here to see the chaser vs contrarian spreadsheet.

It may surprise you that in the period from 1815 to present, there have only been a handful of periods when there have been two or more consecutive calendar years of negative returns on the US Stock market. This doesn't mean the market only takes a year or two to recover to its old highs (the CRSP Universe index took until December 1944 to recover to the previous market high set in September 1929, including dividends), but if we accept that money invested prior to a crash is lost money and ask how long it takes for markets to start up again it is easy enough to see that consecutive losing years are fairly rare.

I have used two data sources for the following information. A study into the returns of the US Stock market from 1815 through to 1925 titled "A New Historical Database for the NYSE 1815 to 1925: Performance and Predictability" done by William N. Goetzmann, Roger G. Ibbotson and Liang Peng of the Yale School of Management, July 14, 2000, available for download from http://papers.ssrn.com/paper.taf?abstract_id=236982 provided the data for the period 1815 to 1925. From 1926 onward I used CRSP data provided to me by Dimensional Fund Advisors. For the early period, there was some difficulty in collecting dividend information, because they were obtained by manually reading old newspapers. The authors provided a high and a low estimate of dividends. I've used the lowest estimate of dividends below when calculating the total return of the market in the years below.

One point that should be made of this. If you are the type of investor that tends to sell after your portfolio has fallen in value, and buy after it has risen, you are quite likely to do poorly in the long term. In almost all cases appreciation in the immediate aftermath of a bear market has been very strong. I don't know when the bear market we are in now will end but historically selling out after three consecutive years of losses has been a lousy strategy.

I produced a graph that united the early numbers with the 1926 - 2002 CRSP data. The result of this is below:

This is typical of very long term charts, it shows what appears to be nice smooth and uninterrupted growth. Over the long term, that is certainly true. I'm more interested though in returns over rolling five and ten year periods, which is more applicable to the real world needs of actual human investors. From the same data above, I produced these charts which calculate rolling five, ten and twenty year returns, they include dividends as well as capital growth. There have only been two periods when an investor in stocks would have had a negative nominal return in a ten year period, though the uniformity between ten year periods has not been great and certainly there have been some much better ten year periods than others. Five year periods have been all over the place.

I'm using the period from 1825 in all these charts because 1815 - 1824 had price appreciation info, but not dividends.