One bank crunched 200 years of data to show why it pays to stick with stocks over the long term

Deutsche Bank's 200-year global data analysis indicates that diversified equity portfolios overwhelmingly outperform cash over the long term, underperforming nominally only 0.8% of the time over 25-year periods and 7.5% in real terms. While current high valuations (e.g., S&P 500 forward P/E above 23) and low dividend yields historically correlate with weaker future returns, and individual stock picking carries significant risk, the research underscores the enduring advantage of a long-term equity strategy, a perspective relevant amid recent market volatility driven by valuation concerns.

Analysis

Deutsche Bank's extensive 200-year global data analysis reveals that diversified equity portfolios overwhelmingly outperform cash over the long term. Over 25-year periods, stocks nominally underperformed "cash under the mattress" in only 0.8% of instances, with real-term underperformance at 7.5%. This underscores the historical resilience and wealth-generating capacity of equities, despite more frequent nominal declines over shorter five-year periods (13.6%).

However, the report also highlights current market conditions that historically signal weaker future returns. The S&P 500's forward P/E ratio recently topped 23, marking its highest level in years and significantly exceeding its 5-, 10-, and 15-year averages. Concurrently, dividend yields are near historical lows, and elevated CAPE ratios suggest a potentially challenging environment for equity performance.

While equities generally outperform, bonds have bested stocks 22% of the time over the long term, indicating that fixed-income timing is also critical. The analysis specifically emphasizes that these long-term equity benefits apply to diversified portfolios, as a majority of individual stocks have underperformed Treasury bills over significant periods (1990-2018). Recent market volatility, including a significant selloff driven by valuation concerns, further underscores these risks.

Key Decisions for Investors

• Maintain strategic, long-term exposure to diversified equity portfolios, leveraging the historical evidence of outperformance over 25-year horizons.
• Exercise caution regarding current elevated equity valuations, such as the S&P 500's high forward P/E and low dividend yields, which historically correlate with weaker future returns.
• Prioritize broad diversification across asset classes and within equities, recognizing the significant risk associated with individual stock selection and the importance of portfolio construction.
• Monitor fixed-income market cycles closely, as bonds have historically outperformed stocks in certain long-term periods, necessitating dynamic asset allocation considerations.