The Credit Suisse Research Institute has collaborated with experts at the London Business School to produce the "Global Investment Returns Yearbook 2009". The Yearbook is an analysis of returns since 1900 for stocks, bonds, cash, foreign exchange and inflation in 17 stock markets and three worldwide indices.

In the Yearbook, the authors, Elroy Dimson, Paul Marsh and Mike Staunton, of the London Business School, point out that the last decade has been a lost decade for equity investors. Since 2000, the MSCI World index has lost a third of its value in real (inflation-adjusted) terms, while the major markets all gave negative annualised returns of 4 to 6 per cent.

But they argue that equity investors should keep faith with stocks, and take heart from the long term record. Over the period since 1900, they point out, the real return on shares was positive in all 17 countries, typically at a level of 3 per cent to 6 per cent per year. Equities were the best performing asset class in every country.

The Yearbook research shows that historically, global investors have earned a risk premium of 4.2 per cent per year from investing in equities rather than cash; the authors argue that equities are likely to outperform cash by 3 to 3.5 per cent per year over the long run.

While 3.5 per cent per year may sound a modest premium, equity returns still compound quite quickly. Equity investors can expect to increase returns by around 40 per cent relative to investing in cash over a 10-year horizon, and double returns over 20 years.

Compared with the 1980s and 1990s, however, this is likely to be a process of "slow accumulation," the authors say.  Investors should take a long-term view, and be ready for the inevitable periodic setbacks.

The past year has provided a savage reminder about equity risk. Investors will be compensated for taking equity risk in the future; but the way they will be paid is highly uncertain. The Dow hit its all-time high of 14,164 on 9 October 9, 2007; according to the Yearbook's authors, there is a 50 per cent probability that it will regain this high within 13 years. 

Meanwhile, investors will also enjoy dividends. But the market will not reach its destination smoothly: returns could easily come in a short burst rather than gently over time. There are risks to being out of equities as well as in.

Based on their investigation of the history of 17 financial markets, the authors report that, over the long haul, most of the real (inflation-adjusted) performance from equities is attributable to dividend income.

"In the light of the 2008 bear market, we revisited the long-term return from equities. Over the last 109 years, out of a total return of 5.1 per cent per year in real terms from UK equities, capital appreciation amounted to only 0.4 per cent, while dividends provided the rest. All investors should focus on total return, including reinvested income," Dr Staunton told WealthBriefing at the Yearbook’s launch on Tuesday.

The 2009 Yearbook provides a wide range of financial market information and insights. As well as articles by Messrs Dimson, Marsh and Staunton, Jonathan Wilmot, chief global strategist at Credit Suisse reviews major secular and cyclical themes in the world economy over the last 200 years, and explores alternative scenarios for the future.

At the end of this month the Credit Suisse Research Institute will publish the Global Investment Returns Sourcebook. The Sourcebook will contain detailed tables, charts and listings as well as extensive evidence on the impact of investment style on portfolio performance.