[SINGAPORE] We often navigate our portfolios by looking through the rear-view mirror of the last five or 10 years, assuming the future will be reasonably similar to the recent past.

However, a report from the CFA Institute Research Foundation, Five Financial Eras, suggests we gaze at too small a slice of time.

By analysing nearly a millennium of data, the report’s author, economist Bryan Taylor, argues that while the markets are not a repeating loop, they do follow predictable “zeitgeists” that define entire generations.

For the savvy Singaporean investor, the lesson is not that history repeats itself perfectly, but instead that it provides a “yardstick” to measure the trends of today.

The yardstick principle: descriptive, not predictive

Taylor’s work stresses that its analysis is descriptive, not predictive.

While we can identify contemporary forces at play, we cannot predict the exact behaviour of the markets in the 2030s or 2040s in anything more than general terms.

In the era of “technology wars”, we may make educated guesses by extrapolating factors such as technological edge or access to critical resources.

But the winners of tomorrow are exceedingly difficult to determine. For example, few could have envisioned the fall of the Berlin Wall in the flames of Kaputnik during the Space Race.

In essence, history informs us of the patterns of returns, not the specific cycle in which we stand or its precise length. Success is not about statistically mapping the future; it is about having a realistic sense of history to recognise when the global order is shifting.

The mirage of the “magic number”

Perhaps the most common error in financial planning is the search for a fixed equity risk premium, or the extra return risky stocks are expected to provide over government bonds.

We often assume this number is relatively stable and sizeably positive in the long run, perhaps 4 or 5 per cent.

Unfortunately, Taylor’s data shows this is a mathematical fantasy. There is no such thing as a fixed, dependable equity risk premium.

Instead, it fluctuates dramatically, ranging from a staggering 20 per cent in the 1950s to a painful minus 10 per cent in the 2000s.

Future expectations of the equity risk premium are therefore subject to wide and protracted margins of error, rendering retirement plans predicated on “magic numbers” for returns that are untenable.

The “Twig” that determines your wealth

If a diversified stock portfolio cannot guarantee stable excess returns, what actually drives the patterns we see?

Taylor introduces the “Twig” theory, an acronym for the four forces that have defined market eras for 900 years: trade, war, inflation and the government.

The pattern is simple. When trade is free, wars are absent, inflation is low and the government stays out of the way, financial markets provide higher returns.

Conversely, when any part of that “Twig” breaks – when reciprocal tariffs arise, special military operations erupt or governments nationalise industries – returns inevitably falter.

For Singapore, an export-oriented economy, this historical insight is vital. Taylor notes that export-oriented economies have historically higher market capitalisations than those mainly catering to domestic consumers.

Yet, we are currently entering a period defined by trade restrictions, geopolitical decoupling and government intervention not seen since the Cold War.

We are moving away from the free trade of the 1980s that allowed entrepots to thrive and veering towards a global order whereby might is right and bilateral ties, rather than comparative advantage, may dictate market outcomes.

Respecting the irregular rhythm

The report identifies an approximate 30-year cycle in stocks.

Since 1900, decades of extraordinary returns, such as the 1920s, 1950s, 1980s and 2010s, have almost always been followed by extraordinarily poor decades.

The 2010s were a fantastic period for technology stocks, but history warns that the 2020s are likely to see lower returns, potentially reaching a low point in the 2030s.

However, this cycle is irregular and does not match calendar decades perfectly. For instance, the lowest returns of the early 20th century were in the 1930s, not the 1940s.

This lack of precision is why history should be used as a yardstick for expectations, rather than a quantitative schedule for trading.

The end of the perfect tailwind

Many Singaporean investors have spent their entire adult lives in a world where interest rates were falling. From 1981 to 2020, this 40-year slide created a perfect tailwind, as falling rates pushed both bond and stock prices higher.

The phenomenon was dubbed the “second interest-rate pyramid”, a mountain of rising rates from 1945 to 1981, followed by a long descent.

In 2020, we hit the bottom of that pyramid, with rates reaching their lowest levels in history. The historical lesson here is practical.

The yield to maturity on a 10-year bond is one of the best predictors of its future return. Because the bond yields and prices are inversely related, higher future interest rates lead to capital losses that offset yield income.

With rates rising from their 2020 lows, the tailwind has officially become a headwind.

For fixed-income investors, 2021 and 2022 had some of the worst losses in history outside of hyper-inflationary periods.

Prudence over propaganda

Although “what’s past is prologue” is a dangerous assumption when applied to specific numbers, understanding historical patterns remains one of the best ways to avoid being blinded by the headlines of the present.

We are no longer in the era of easy globalisation and rules-based international order. We are in a world of technological warfare, where the “Twig” is under pressure from rising geopolitical tension and sticky inflation.

Bear markets are becoming more frequent and internationally coordinated because of instantaneous communication.

As you review your portfolio, ask yourself: Am I investing based on a mathematical fantasy of historical 7 per cent annual returns, or am I setting realistic expectations in today’s higher-priced, lower-return world?

Success is not about predicting the exact length of the next cycle. It is about recognising when the global zeitgeist has shifted and adjusting your sails accordingly.

In a world where the headlines are loud, the best asset you can own is a realistic sense of history.

The writer is a member of the investment solutions team, Phillip Capital.