I`ve written about this before and the problem is survivorship bias (see What actually happens in the long run). This chart of equity returns likely referred to US equities, but that`s really a form of cherry picking the successful markets.
Consider that a little over 100 years ago, the Archduke Ferdinand, heir to the Austro-Hungarian throne, was assassinated in Sarajevo and that event sparked the
What about emerging markets? At the time, the major EM markets consisted of the US, Canada, Argentina and Japan. What would have that kind of diversification bought you?
Risk of war and confiscation
What people seem to forget is one long-term risk of investment is the risk of the permanent loss of capital from war and confiscation. The story of my own family is a vivid illustration of that point.
My father`s family is ethnic Chinese from Vietnam. My great-grandfather, the Old Man, made his fortune when he went to Vietnam as a penniless immigrant from China. Over time, the family became one of the more prominent Chinese families in Vietnam and owned about one-quarter of the property in
Not that I am complaining, but I hardly had an upbringing that was equivalent to one of the Rich Kids of Instagram. That`s because the vast majority of family wealth vanished because we fell victim to the risk of war and confiscation.
Imagine a diversified portfolio...
Going back 100 years, consider how a diversified balanced portfolio of stocks and bonds invested in then blue-chip "developed markets" might have performed, either on a capitalization or equal-weighted basis. The only one that survived relatively intact was the UK. The others, France, Germany, Austria-Hungary (yes, remember them?), Russia suffered tremendous hardship, *ahem* involuntary changes in governments and capital destruction.
So whenever someone shows me a chart of long-term equity returns and tries to use those figures as their assumption to calculate either equity return assumptions or the equity risk premium, I shake my head.
The moral of this story is: When you build models, you have to think hard about your assumptions. Don`t get blinded by either cultural or survivorship biases.