The report provides a comprehensive analysis of the historical risk premium in Spain and it concludes that the long term is a good ally for investment in equities.
· Long-term investment in equities protects against inflation.
· The return on equities has risen a hundredfold in the last 30 years, outperforming long-term bonds by nearly 5 percentage points.
An investment of €100 in the Spanish Stock Exchange’s Indice Total index in January 1980 would have been worth €9,254 at the end of June 2010, equivalent to a 16% annual return, according to a Report released by the BME Research Department analysing the returns of listed shares on Spain’s stock exchange over the last 30 years.
Reinvestment of dividends and other related income would add nearly five percentage points a year to this figure. A €100 investment in the same period in the – IGBM - (excluding dividends) would have risen to €2,539, a 10.7% annual gain.
The data contained in the study show that the long term is one of the best allies for the asset classes studied, especially equities.
Positive returns for long-term investment in equities
Equities always gain in value when the investment is in a diversified portfolio, such as the index, and is held for over six years.
The study on investment in equities shows positive returns in most of the sub-periods of more than a year and up to 30 years: of the 62,300 investment periods analysed, only 4.6% showed losses. In other words, returns were positive in 60,000 periods.
Long-term investment in equities protects against inflation
The report also examines the relationship between long-term investment in equities and the protection against inflation. Comparisons are made by deflating the total index in order to obtain real rates of return. The outcome shows that, in effect, investment in equities protects capital from losing monetary value because of inflation.
Stripping out the impact of inflation, a €100 investment in the Spanish Stock Exchange’s Indice Total index in January 1980 would have risen to €1,862 by June 2010, equivalent to a real annual return of 10%. To put this another way, inflation would have detracted an average of 6 percentage points annually from the return obtained on investment in shares.
In this case, it is not until periods of 11 years that annual returns are positive in 100% of the cases studied. For periods from 11 to 30 years, returns exceed 9% in 75% of the cases.
Excess returns by stocks over bonds in the long and short term
One of the main objectives of the report was to take an in-depth look at the historical risk premium of the Spanish stock market, i.e. the excess returns over the long term provided by investment in equities over the returns provided by a risk-free asset or a proxy for the risk-free rate.
For the longer periods analysed in the study, the cumulative annual excess return on investment in equities over long-term fixed income instruments was 4.78 percentage points as at 30 June. This is Spain’s historical equity risk premium.
A 10-year bond worth €100 in January 1980 would have been worth €2,576 at end-June 2010. This would equate to an 11.2% annual return. In this case, a long time period also benefits the investment.
A closer look reveals that in all possible investment periods of over 10 years, the risk premium between investment in stocks and bonds entails an excess return by investment in equities of 4-6 percentage points.
In short, the data provided underscore that time is a great ally to investment in the assets analysed and that the long-term returns provided by a diversified equity portfolio outweigh the risks assumed. The results also showcase the benefits of ETFs, exchange-traded funds that track market indices, as a simple investment tool that diversifies exposure.
Key
Hover over the blue highlighted
text to view the acronym meaning
Hover
over these icons for more information
Comments:
No Comments for this Article