Investors are likely to become appreciably richer by investing in equities, rather than bonds or cash - but... the process is likely to be... slow Global Investment Returns Yearbook

The Global Investment Returns Yearbook, compiled by three London Business School academics under the auspices of investment bank ABN Amro, mines more than a century of market data in an effort to draw conclusions about future performance.

The authors - Elroy Dimson, Paul Marsh and Mike Staunton - are modestly optimistic about an upturn in the longer term, and remain confident that shares will always eventually outperform bonds and other investments.

But they also acknowledge that over the past three years, some $13 trillion has been wiped off stock markets worldwide - $2,000 for every man, woman and child on the planet.

With 2002 having been the poorest stock market year for almost three decades, the current bear market could end up being the worst on record.

Four in a row?

Whether it will achieve that dubious distinction or not is largely down to market performance this year.

If 2003 turns into another negative year, it will be only the second time that the UK markets have fallen for four successive years.

The report's authors admit that historical precedent can tell absolutely nothing about future market behaviour.

"But once three successive annual returns have been in the same direction, the market is unlikely to have any memory of this, and a continuation of the trend is about as likely as a reversal."

Worldwide, over the past century, 38% of years have delivered negative stock market returns.

62% chance of success

It is this fundamental fact that gives the authors long-term comfort about shares.

"The good news is that over a full year, markets are more likely to rise... than to fall.

Could 2003 be 1929 all over again?

"This is all a part of the compensation offered to equity investors as the reward for accepting the very real risks to which they are exposed."

Over the 103-year history of the authors' database, the US stock markets averaged an annual return of 6.3% over and above inflation.

Most European markets tend to be less generous, but UK shares still yielded an impressive 5.2% over inflation in 1900-2002.

Bonds, meanwhile, yielded an annual 1.9% in the US and 1.3% in the UK over the same period.

The slow-motion bounce

But while history can be a comfort, it does not follow that this bear market will unwind like similar-seeming past situations.

For what it's worth, history is on your side

After huge crashes in 1973-74 and 1987, for example, stock markets regained their highs within three years.

This probably will not happen now, the report argues - mainly because today's markets are relatively overvalued by comparison with company earnings, when compared with the markets of the 1970s and 1980s.

The authors point to the Japanese stock market, which has been broadly falling for more than a decade, to prove that not all bear markets bounce back straight away.

The authors insist, however, that the bounce will come - eventually.

"Investors are likely to become appreciably richer by investing in equities, rather than bonds or cash.

"But compared with the 1990s, the process is likely to be one of 'getting rich slowly'."