Should we be confident in the future of the share market?

The Amsterdam stock exchange is considered the first modern stock exchange in the world. It was founded in 1602 to facilitate a major capital raising by the Dutch East India Company, which was also the world’s first publicly listed company and the first to pay a dividend – and it was paid in spices!

In the centuries following, countries all around the world opened exchanges to facilitate the trade in stocks, bonds and commodities.

The history of share markets is long and complex, with long periods of optimism peppered with stock market crashes and bear markets.

However, despite all this, the long-term direction of the stock market has always been up.

Stock Price Growth

Jeremy Siegel, author of the book Stocks for the long run, calculates that the long-term real return from investing in stocks, after inflation, since 1802, is 6.7% p.a.

If you add in a couple of percent for inflation, this brings the headline long-term returns for stocks into the range of 8.5% - 10% p.a.

Siegel, who is bullish on the future of stocks, has said that this real growth rate of 6.7% p.a. has remained “remarkably durable” over the last 30 years, even with the extraordinary events of the GFC and the Covid-19 pandemic.

There are several reasons why stocks tend to go up over time.

One reason is population growth, which provides incremental revenue and profit growth for the companies that provide the goods and services that these new residents need.

Another reason is continual innovation and productivity improvements.

Since the industrial revolution, the process of business improvement has never stopped. Each and every year, companies use new machines, software tools, new methodologies, and workforce reorganisations, to find productivity and efficiency gains. This can lead to incremental increases in profits, and thus higher share prices.

These trends will continue well into the future.

Mistakes

With this 200 years of data showing long-term healthy stock price growth, one would think that it would be easy for investors. But it isn’t, as we’re all subject to psychological biases that can cause us to make mistakes.

According to Siegel, the biggest mistake investors make, is trying to time the market. He said, “They get scared at the bottom, they get overly bullish at the top. As a result, they take money out when it’s at the bottom, they put more money in at the top, and even if you’re purely indexed, you’ll underperform”.

Hence, one of the biggest reasons for underperformance is fear and greed, which can result in people selling at the lows and buying at the highs. We often do this because we have a tendency to follow the herd, in a bias known as the Herding Effect.

Wall of worry

It is said that the market climbs a wall of worry.

Over the past 120 years, we’ve had two World Wars, the Great Depression, the Cuban missile crisis, the cold war, pandemics, oil crises, debt defaults by sovereign nations, and market crashes. Yet despite all this, the market has continued to march forward. The question is, will it continue to move forward in the future?

In an interview on CNBC, Warren Buffett was asked what he worried about. He said that he worried about the nuclear threat and another pandemic, but he doesn’t worry about Berkshire Hathaway.

Buffett believes in focusing on the things we can control, and if there’s a problem with Berkshire, he’ll focus on that problem and fix it.

Optimism

In markets, there has always been something to worry about, but we have to remember that every time our economy has moved into recession, it has also recovered, and this will continue to be the same into the future.

We just have to remember that fear can cause us to do the very thing that we shouldn’t be doing, such as selling out at exactly the wrong times.

So, how do we navigate our future investing?

It all comes back to the tried-and-true investment rules. Invest regularly and for the long term, and diversify your portfolio across asset classes, stocks, sectors, and geographies.