The Macroeconomic Role of Investment Funds and the Earnings Prospects of Long-term Share Investments

Austrian investment funds contributed to 0.1 percent of the total economic value added. Their financial value is much more important. The financial market turbulence since 2008 calls into questions whether investment in a share portfolio with a long investment horizon makes any sense. Shares offer a higher expected return than investments on the money or bond market. Over the last 40 years the nominal expected returns converted into Euros, lay between 9.1 percent p.a. (USA) and 12.2 percent p.a. (Japan). For European shares the level was 10 percent over the same time, in between the USA and Japan. The high expected returns on shares are however accompanied by considerable potential for fluctuations. This potential for fluctuations is calculated in the current study using a Bootstrap simulation of an econometric model for the money market interest rates and excess profits. The simulated confidence intervals become tighter the longer the investment horizon and they show that capital losses from an investment in shares in Europe (excluding UK), taking into account inflation, can be excluded from investments with a horizon of 25 to 30 years, with a probability of error of 5 percent. Extending the length of the investment to 100 years does not provide 100 percent security against real capital losses. This loss potential counters the extremely high profit potential. With an investment period of 25 to 30 years a European share portfolio (excluding UK) can produce, with 5 percent probability, a real return of over 13.7 percent p.a.