MW What 125 years of data says about diversification and investing at record highs

By Steve Goldstein

Global investment returns yearbook finds stock-market investing is profitable, but volatile

Making its way around social media was the clip from "Ferris Bueller's Day Off" in which the economist Ben Stein explained the Smoot-Hawley Act, when Republicans raised tariffs in a bid to increase revenue and ended up exacerbating the Great Depression. Wonder if there's any current relevance.

So it's probably a good day to travel down memory lane, with the release on Tuesday of UBS's global investment returns yearbook, which now has 125 years of data to mine.

Put together by Paul Marsh and Mike Staunton of the London Business School and Elroy Dimson of Cambridge University, the yearbook finds that from 1900, inflation-adjusted annual returns on U.S. stocks have been 6.6% per year, versus 1.6% for bonds and 0.5% for bills. For the world ex-U.S., stock-market returns, adjusted for inflation, have averaged 4.3% per year, so there's definitely been a theme of U.S. exceptionalism, even if that has not been the case for the first two months of 2025.

That said, volatility has also been a hallmark of stock-market investing. After big drawdowns, it takes a while for investors to be made whole - 15.5 years from the Great Depression, a decade for the mid-1970s oil shock, 7.5 years after the dot-com bust and four years from the global financial crisis.

One interesting finding was the look at international diversification, which was popularized in 1974. The authors looked at the Sharpe ratio - a measure of reward to volatility - and found it didn't work, for Americans, after 1974. That said, most other countries did benefit from international diversification. "Prospectively, worthwhile for all countries, including the U.S.," say the authors on international diversification. "But not guaranteed; sensible decisions can have poor outcomes."

Cross-asset diversification also has been effective, even if it didn't work recently, during the most recent spike in inflation. While the 2000-to-2021 period where stocks had a negative correlation with bonds was not the norm, the long-run average correlation of 0.33 is "very useful" for diversification purposes, the authors say. The 60/40 model of 60% stocks and 40% bonds has a better Sharpe ratio than for stocks alone and especially more than bonds alone.

Diversification also pays off within the stock market. Looking at 64,738 companies from 42 countries from 1990 to 2020, 57% underperformed Treasury bills and 71% failed to beat the index. The best stocks, however, more than made up for the laggards.

Excluding the worst 20 months over the last 125 years would've improved stock-market returns by just over 3% per year, but excluding the best 20 months over the last 125 years would've hurt stock-market returns by nearly 3% per year, they add. "Investors should be well diversified - unless they are talented stock pickers. Otherwise, they are likely to underperform," the authors state.

The authors also dismissed fears about investing at all-time highs, pointing out that over the last 125 years they have not been a sell signal. "Many people were saying for many years that the U.S. is becoming too heavy in those portfolios, and those people got out too early," noted Dimson in a question-and-answer session.

Marsh was asked what advice he had for investors. Basically, it was to close your eyes, which certainly has applicability in the current moment. "Don't look at your portfolio frequently," he said. "Just stay invested."

The market

U.S. stock futures (ES00) (NQ00) paused after the worst day for the S&P 500 SPX this year. Gold futures (GC00) continued to gain ground, while the U.S. dollar DXY declined.

   Key asset performance                                                Last       5d      1m      YTD     1y 
   S&P 500                                                              5849.72    -2.23%  -2.42%  -0.54%  14.01% 
   Nasdaq Composite                                                     18,350.19  -4.86%  -5.37%  -4.97%  13.22% 
   10-year Treasury                                                     4.166      -13.50  -34.40  -41.00  1.10 
   Gold                                                                 2924.5     -1.50%  2.59%   10.81%  37.75% 
   Oil                                                                  67.75      -4.46%  -6.33%  -5.73%  -13.98% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

The buzz

The U.S. import tariffs went into effect as promised by President Donald Trump - 25% on Mexican goods, 10% on Canadian energy imports and 25% on other Canadian goods. Chinese tariffs were doubled, to 20%.

China, unlike in February, did respond with tariffs on agricultural imports as well as restrictions on 25 American companies as Canada set a schedule of tariffs on $100 billion of American imports over 21 days. Mexico has yet to respond.

Saudi Aramco reduced the world's largest dividend.

Target $(TGT)$ and Best Buy $(BBY)$ are set to report results, with CrowdStrike $(CRWD)$ among those reporting after the close of trade.

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The chart

The award for most complacent market might by the one for high-yield corporate bonds JNK. While there may be a growth scare in the stock market, Bank of America finds the credit-default swaps of high-yield bonds are in the 13th percentile since 2012, with volatility in the seventh percentile since 2015. The lower the value of CDS swap, the less the annual cost of protection for the buyer is.

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

   Ticker  Security name 
   NVDA    Nvidia 
   TSLA    Tesla 
   TSM     Taiwan Semiconductor Manufacturing 
   GME     GameStop 
   PLTR    Palantir Technologies 
   SMCI    Super Micro Computer 
   AAPL    Apple 
   AMD     Advanced Micro Devices 
   AMZN    Amazon.com 
   NIO     Nio 

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-Steve Goldstein

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(END) Dow Jones Newswires

March 04, 2025 06:34 ET (11:34 GMT)

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