 Good day, fellow investors. Today's topic is perhaps the most important thing that's related to investing. So much more important than picking the right stocks. And I'll use Seth Claremont's quote to explain it even better. The challenge of successfully managing an investment portfolio goes beyond making a series of good individual investment decisions. This is something that's so overlooked but extremely important. And the point is that we have to see, okay, what are the expected returns on the portfolio for the next 10, 20, 30 years depending on our investment horizon, what can we do about it and whether what's going on in the market now will lead to our goals and to successful investment returns. The best way to approach that is to look from a global perspective, from a statistical risk-reward perspective what can happen with stocks in the next 100 years or in the next 20 years. And the best data to do that is the book from London School of Economics professors, Elroy Dimson, Marsh and Stolton that have written the book Triumph of the Optimists, where they describe what has happened across a lot of markets, global markets over the last 116 years because they are updating that book for Credit Suisse every year. So we're going to look at historical returns, what happened, what are we thinking will happen with stocks and what is the actual most probable statistical outcome. This is key for understanding to know how to position yourself and then how to make investment long-term decisions. Stick with me, hope you like it, I know it's boring but it's the key of investing, what can I do? So the main questions investors worry about are their returns and their risks. What we want to know is what will our return be and what is the probability that it won't be positive over a certain period of time. This chart shows long-run asset returns for all countries from 1900 to 2016 and you can see how returns, real returns on stocks, the blue columns go from 1% in Austria, 2% in Italy, 2% something in Belgium, 3% in France, Germany, Portugal, Spain, 4% in Japan, Europe, 4% and then as we go to higher returns we have world 5% and the top three are the US 6.4% Australia and South Africa. The yellow columns are bond returns and the green columns are T-bills, that's not something interested especially in this market. When everybody says okay stocks will return 6-8% over the long term, no stocks on average globally have returned 5% real returns. The top market which is in this case or has been in the last 100 years the US market which leads to the title triumph of the optimists because yes the optimists that invested in the US triumphed but only those in the US. So we have to see okay will the same that happened in the US over the last 100 years happen in the next 100 years and whether we can do something about it to increase our returns and lower our risks. Let's see what can happen if your investment horizon is let's say 20 years. Everybody is saying oh nothing wrong can happen if you invest for the long term but let's look at this. This is for the US market which has been the top market in the world and you can see here that there were periods as long as 20 years you can see the black arrow in the bottom left corner that shows that it took up to 20 years for stocks to reach positive returns in the worst scenario in the last 100 three years. Over 40 years there have been yearly real returns of about 3%, 50 years, 5%, 70% and then we go to the average that was 6% over the last 100 something years. But this means that there is a chance that our returns in the next 10 years 20 years so stock market returns in general not our we're going to do something different will be negative, will be 2% real returns or will be 4% which is the most likely case given the valuations. So people go into the stock market pension funds expect 7% returns but we can see that statistically it is a wrong expectations so I really think people think that what happened in the past will happen again in the future but that's completely statistically and not backed by facts and that's where we have to be careful and that's something we have to take advantage of and that's something we have to warn other people but they will not listen so we might try to save somebody let's go on. If we look at the same returns for Italy we can see that the black arrow goes to 75 years which means that in the worst scenario people that invested in Italy had to wait 75 years for positive real returns 75 years. Can that happen to the US market to other European markets to other stock markets? Yes it can happen statistically it can happen there is a probability the professors say of 6% that general stock market returns will be real returns will be negative over the next 20 years that's the average statistical when you add the valuations when you add the economic debt when you add anything that 6% becomes a little bit bigger not to give any statistical data here because also the professors say that we have only 100 years to look at the stock market which includes five periods of 20 years that's not enough for any kind of statistical significance in 300 years we will have more data to see with more statistical significance what will happen but this is academics the reality is that stocks are overpriced and will probably lead to negative long-term returns and that's something we have to keep an eye on. Let's see what to expect in the future if you own only one stock market only one country you can expect let's say 5% is the average global return with a standard deviation of 20 ups and downs during the year but you can expect negative returns of 7% in the worst-case scenario over 10 years 5% over 20 years negative 2% over 30 years and so on and so on with the average being 5% the positive returns 17% per year over 10 years extremely positive scenarios now you can lower your volatility by investing in different countries if you include eight countries in your returns your returns will be similar but your standard deviation will probably be different thus less volatility less risk this is what has been the case over the last 100 years so my point is investing in the stock market is a low return business for high risk because you can get 4% now but you can risk having 20 years of negative returns even if things look so good now things look extremely good in the rowing 1920s 1928 1929 and we all know what happened in the subsequent 40 years for me these numbers are really staggering and that's why I emphasize their importance it is important to understand that what we think and what has happened in the last 35 years is unlikely to replicate itself in the next 35 therefore we have to be smart and not invest in index funds because those are too risky but really use common sense and find common sense low risk high potential return investments in this environment everything that I have been talking about on this channel for the last 10 months what's very important is that when there are low real interest rates which are still now negative inflation is 2% interest rates are 2% at max are below that so real interest rates are negative and you can see that five year stock market returns are usually negative in such a situation the higher is the real interest rate the higher are real stock market returns and real bond returns so from an investing perspective the current situation if we look at all the countries we have mentioned over 2317 country years is the worst possible situation to invest in and expected long term five year returns in this case will probably be negative further what will push interest rates higher only inflation in this case as long as real interest rates the federal funds interest rate is below inflation which means real interest rates are still negative and we can see here that the lower the inflation rate is the higher are stock market returns as long as inflation is is the bottom half then stock market returns are good as inflation ramps up so in the top 50% of cases over 2453 country years in this data set we can see that stock market returns turn negative so if there is higher inflation low inflation good for stocks higher inflation not good for stocks low real or negative really returns interest rates very negative for stocks high real returns very positive for stocks looking forward from 2017 from the professors really they have very very low expectations on real returns on bonds a little bit higher from emerging markets stock market returns world usa japan uk around 3% which is much less than the world since 1950 and the world since 1980s this might really affect the fact that everybody is crazy about index funds and you can see here how in the last 10 years actively managed funds really lost money and index funds really gained money and everybody's following the index fund mania because that is what has worked over the last 45 years but given the statistical data we have seen it might not work in the future so we really have to apply common sense look at good diversified investments that are low risk with a little bit higher returns taking advantage of the irrationality that everybody is investing in index funds at some point in time the smartest thing to do the lowest risk higher return will be to short everything as all those people who blindly invested in index funds will be disappointed when they see that what happened in the last 45 years or the 6% they expect won't be 6 but it will be negative over the 10 years and that's something we have to prepare ourselves think about see how our portfolio fits what might happen higher inflation more money printing whatever so i will stop here for today giving you some food for thought on what happened what might happen statistical data from london's business school of economics a very good school i'm looking forward to your comments we'll be discussing more how to be best prepared how to learn more about investing so please subscribe if you haven't thank you for watching and i'll see you tomorrow in the comments video