South Africa, Australia top stock markets in the world for over a century

Americans take pride in what’s called American exceptionalism. They were the first country to practice democracy in modern times. They were the first with no monarchy or aristocracy. America was the first country to free itself from European control. It admitted new territories, not as colonies, but as equal states. Americans let capitalism flourish, among many other achievements.

So it’s no wonder that some investors think that American stocks have done exceptionally well too. After all, what started out as 13 British colonies along the Atlantic coast has become by far the world’s largest economy. But, while American stocks have done better than most, they are not exceptional.

Australian and South African stocks won

History shows that American stocks have performed well over time. From 1900 through 2012, they provided average real (removing the impact of inflation) compound returns of 6.2 per cent.

Three British economists—Elroy Dimson, Paul Marsh and Mike Staunton—examined the historical returns of stocks and bonds in 19 countries from 1900 through 2012. A portfolio that invested a dollar in all 19 countries in 1900 would have generated an average yearly real compound return of 5.4 per cent. This is relatively close to the real compound return of American stocks.

Both Australian and South African stocks beat American stocks. Their average yearly real compound returns from 1900 through 2012 were above seven per cent.

Canadian stocks were in sixth place

Canadian stocks were in sixth place—after South Africa, Australia, the United States, Sweden and New Zealand. From 1900 through 2012, Canadian stocks outpaced the stocks of the United Kingdom, Finland, Denmark, the Netherlands, Switzerland, Norway, Ireland, Japan, Spain, Germany, France, Belgium and Italy.

Many of these countries suffered from economic disasters such as hyperinflation, depressions and wars. Even so, the stocks of all 19 of them experienced positive compound real returns from 1900 through 2012.

We have often noted that American stocks outpaced American government bonds and Treasury Bills. The longer the time period examined, the greater the outperformance of stocks.

This was also true of all 19 countries examined by Dimson, Marsh and Staunton. On average, stocks returned 3.7 per cent more than government bonds and 4.5 per cent more than T-Bills each year.

What’s more, both government bonds and bills produced losses (negative returns) in Italy, Belgium, France, Germany and Japan. From 1900 through 2012, for instance, Italian Treasury Bills lost value at an average compound yearly rate of close to four per cent. This was mostly due to inflation.

Meanwhile, Italian stocks provided real returns of 1.7 per cent. True, this was the lowest return of the 19 countries. But it was still far better than the losses on Italian Treasury Bills and government bonds.

Companies can raise prices, bonds can’t

One thing to keep in mind is that most companies can raise their prices during inflationary times. This can shield these companies and their shareholders from the worst effects of inflation. Ordinary bonds, by contrast, offer investors no protection against inflation. They’ll never pay more than they promised.

In short, it’s worth buying American stocks to diversify your portfolio--particularly when it comes to manufacturers and consumer products and services companies. But since American stocks are not exceptional, it’s worth buying stocks in other advanced countries as well.

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