Professor Russell Napier runs a financial market history library in Edinburgh called The Library of Mistakes. For him, there’s one standout lesson that financial history teaches us.
People sometimes ask me: ‘What is the number one book to read on finance?’ and it’s a book by Elroy Dimson, Marsh and Staunton called Triumph of the Optimists.
The book is a roadmap of the historical returns from equities, bonds, and cash over a very prolonged period and it allows you to work out what has been a reasonable return and an unreasonable return.
In other words, what you can expect from a market and what you can’t expect from a market based off market history.
“I think the simple answer from that, all that data, is that you do need to diversify; and not just between equity markets but between asset classes”.
Triumph of the Optimists, charts financial returns over the entire twentieth century. No one invests quite that long, but new investors today may be investing for at least 50 years.
You need to take a long-term view of market history.
All investors need to know what the long-term is.
Once they know what the long-term is, then they can adjust accordingly.
All investing involves a degree of risk. But if you diversify and you take a long-term view, you can afford to invest with confidence.