Triumph of the Optimists: 101 years of global investment returns was written by three professors at the London Business School. This heavy book includes Canadian data, not only in the chapter on Canada and in 15 other countries, but in tables throughout the book.."This book is about the long-run performance of equities, bonds, bills, inflation and exchange rates around the world over the 101-years from 1900-2000."p.11 The price: $149. (2002, Dimson, Marsh and Staunton, Princeton University Press) I purchased Triumph of the Optimists not only for the Canadian data but also for the material on dividends. There is an entire chapter on dividends. In addition, total return (gains + dividends) data fills the book: they talk total returns, not just capital gains. "Dividends are a critical element in long-run gains in wealth."p.161 In the 338 pages, there are 95 tables and 131 colour charts. And the explanations are understandable...for university professors (no slight to my sister or brother-in-law).

Here's some data: "While real returns on equities have been higher than on bills and bonds, the margin is smaller than many investors have perceived."p.221 The real return for Canadian equities over the 101 year period was 6.4% (U.S. 6.7%) p.50 Inflation averaged 3.1% in Canada over the 101 years from 1900 to 2000. Add 6.4% and 3.1% and you obtain a 9.5% return on Canadian equities.

The real bond return over the 1900-2000 period was 1.8%.

Real dividend growth in Canada was 0.3% over the 101 years (0.6 in U.S.). In the 1980s, the dividend growth rate in the Unites States was 0.8%; in the 1990s 0.1%. Does this seem low to you? Me too. Here are some comparisons. The average annual real bond return was 0.7% across the 16 countries over 101 years. The U.S. real return on treasury bills was 0.9% over the 101 years.
Value stocks do better we know: we've experienced the results. This book confirms it. "Value and growth investing have given rise to dramatically different records of long-run performance. Value strategies typically emphasize stocks with high dividend yield, or with high ratio of book value to market value of equity. A large body of US-based evidence shows that there has been a higher long-run return, at least over the period from 1926-2000, from investing in value stocks."p.148

With the kind permission of Princeton University Press, this quotation is from Triumph of the Optimists. It's from page 205 in chapter 14 as the three London School of Business professors draw conclusions from their study of 101 years of global investment returns from equities, bonds, bills, and inflation and before their 16 chapters with data from separate countries, including Canada.
"The classic US asset allocation...is one-tenth cash, with risky assets split roughly 60 percent in stocks and 40 percent in bonds. While most advisors will then modify such recommendations in the light of an investor's risk tolerance and investment horizon, many observers have puzzled about this 60:40 stock:bond mix. The fact is, almost any analysis of the historical record suggests allocating more than 60 percent to stocks, and less than 40 percent to bonds. Stocks have displayed a high average return, and low-return bonds have been too volatile to justify a large weighting in an optimized portfolio. Persistently, advisors and investors appear to have selected too little to invest in equities, and too much in bonds. Given the favourable performance of bond markets over the last decade, bonds now offer limited upside potential. Meanwhile, equity prices have declined markedly from their 2000 all-time highs. One might therefore ask whether, on our evidence, investors should cut back on their weighting to bonds, and increase their exposure to equity markets.

Far from pursuing a strategy of maximizing asset-class exposure to equities, we draw a different conclusion from the evidence. There is for the first time a more compelling case for regarding the 60:40 guideline as reasonably sensible. The answer is not principally to do with avoiding excess exposure to the risk of equity investment. Rather, it is to do with the rewards to equity investing. With a smaller equity premium*, the opportunity cost from being out of the stock market now looks smaller. One of our students paraphrased to us what she thought we were saying: 'You don't like today's equity market risk? Then wait a year. It will only cost you 3 or 4 percent.' That is part of it. More generally, a smaller equity premium suggests a lower long-term allocation to common stocks. Bonds have more to offer for the future than they provided over the last century."

*The difference between the return provided by equities and risk free investments , when measured over a sufficiently long period, is called the equity risk premium. Dimson et al computed the world geometric-mean equity premium, relative to treasury bills, to be 4.9% over the last 101 years. The authors estimate the future annualized equity premium, relative to government bonds, to be not far from 3 percent.

One of the reasons I bought Triumph of the Optimists was a review I read about the book which stated that, even though the authors confirmed that over the long term equities provided a superior performance, they did not recommend more exposure to equities in the future. I wanted to know why, in their own words. (I read Warren Buffet's writing, not books about him.) Even though the authors are professors from the London School of Business, I'm still not convinced that their conclusion/interpretation is correct. Ultimately, you must decide upon your allocation.