Brent Sheather: When will we get our money back?

As we are all painfully aware, global stock markets, in United States dollar terms, are down about 45 per cent since their high in October 2007. This decline is shocking and up there with history's worst bear markets.

Many non-expert investors whose retirement unfortunately coincided with the stock market peak will look at the unrealised losses in the regular quarterly reports from their financial planners and wonder if and when their portfolios will recover.

It's not just a few people who have been caught by the elevated price levels of 2007. Even if a retiree put together their international share portfolio with equal purchases each month over the 12 months from April 2007 to April 2008, their losses would not be too dissimilar to investing the lot at the very top in October.

Everyone hates losing money so these quarterly reviews as part of an ongoing monitoring service are quite painful for many, advisers included.

Just when shares will recover and the pain will stop is a good question and one that the three professors at the London Business School look at this year in their usual unbiased and logical fashion in the Global Investment Returns Yearbook.

The yearbook was first published in 2000 for Dutch banking giant ABN Amro by London Business School professors Elroy Dimson, Paul Marsh and Mike Staunton. This year Swiss investment banking giant Credit Suisse took over its sponsorship.

The core of the yearbook is long-term investment return data from 1900 to 2008 for short-term government bills, long-term government bonds, shares, inflation and exchange rates, for 17 of the world's largest stock markets representing 85 per cent of total equity market capitalisation.

The yearbook is the global authority on long-run investment returns and foreign exchange performance.

Besides showing us where we should and shouldn't have had our money every year, it provides a detailed analysis of one or two key investment themes.

In previous years it has looked at whether investors can make higher profits by investing in companies based in higher-growth economies and how dividends forecast equity returns.

Last year's topic looked at momentum investing: what it is, whether it works and its relevance to institutional and retail investors.

Momentum investing is a pretty easy-to-understand strategy and in its most simple form doesn't require a great deal of effort or grey matter.

All it involves is buying those stocks that have gone up, in the hope that trend will continue and, conversely, selling those which are going down. The professors point out that while we might not know what momentum investing is we might still do it or some variation thereof. For instance, all those people who aren't investing at the moment "because the market is going down" are using momentum.

The focus of this year's yearbook is, as you might expect, the "great crash" of last year. The professors seek to answer the question, given normal historic returns from the stock market, "how long will it take to get our money back?"

They looked at two of the largest markets, the US and the UK, and after some discussion reckon it is reasonable to expect shares will outperform short-term government bonds by an average of 3.5 per cent a year.

Using this assumption they estimate probabilities - that, in the case of the US stock market, there is a 50:50 chance that stocks will regain their previous peak by ... wait for it ... 2022. If you include dividend income as well there is a 50:50 chance the pain could end by 2017. Losses are virtually guaranteed to be recouped by 2039 but there is just a one in four chance that markets will have recovered by next year.

The professors conclude "these estimates are simply probabilities. We may be lucky: there may be a speedy rebound, and recovery may be faster than the probability suggests. But there could also be a lengthy Japan-style era in which markets do not recover for a long time".

One conclusion that jumps out from this analysis, apart from the obvious one that shares are a long-term investment, is that because shares are so volatile, income is important.

If you did buy into the share story last year and you won't get your money back until 2017, it would be nice to have a reasonable and increasing stream of dividends in the interim to dull the pain.

Unfortunately many investors don't see all, and in some cases any, of the dividend stream as the dividend yield on the world stock market is only 3 per cent and fees frequently average that level too.

Interesting, isn't it, to see the potential impact of fees on one scenario of when you will get your money back: if all your dividends go in fees you have to wait a further five years from 2017 to 2022.

Brent Sheather is an Auckland stockbroker/financial adviser and his adviser/disclosure statement is available on request, free of charge.