The Long ViewRecent shifts in market policy have catalyzed a notable rise in China’s A-shares, with the Shanghai Composite Index gaining nearly 1,000 points over just ten trading days, marking a staggering surge of more than 36%. However, following this ascent, a rapid adjustment phase began after October 8, where the market saw declines totaling approximately 500 points over eight trading days. As investors grapple with these fluctuations, a fundamental question arises: what should be the reasonable long-term return on stock market investments? To confront this issue, we must step back from the immediate shifts and look at historical trends across global capital markets spanning the last century, analyzing macro and long-term perspectives.1. Historical Annual Returns of the Stock MarketFrom a multi-national perspective, historical data suggests that annualized returns from stock markets hover between 8-10%. Long-term analysis reveals that equities tend to outperform other asset classes on a global scale, albeit with notable variances across different countries and regions. For instance, data from “The Stock Market’s Long Game” reveals that from 1900 to 2020, the real annualized returns in major global markets consistently surpassed those of bonds and bills. Adjusting for inflation, the global stock market achieved a real return rate of around 5.3%, with U.S. stocks at 6.6%, and South Africa leading at 7.1%. Without accounting for inflation, nominal returns globally would be around 9%, which varies per country based on their historical inflation rates—for instance, the U.S. has seen an average inflation rate of 3.2% since the 19th century, leading to a higher nominal stock return exceeding 9.5%.From another perspective, extensive data compiled in “The Stock Market’s Long Game” highlights the nominal returns of various asset classes in the U.S. from 1802 to 2021: equities yielded 8.4%, long-term government bonds 5.0%, short-term bonds 4.0%, gold 2.1%, and cash equivalently to 1.4%. This indicates that an investment of $1 in U.S. stocks in 1802 would equate to about $54.2 million by the end of 2021, considering reinvested dividends. The spectacular performance of stocks showcases not only the high returns they offered over two centuries but also the enduring quality in terms of inflation-adjusted profits.2. Volatility and Time in the Stock MarketThe stock market is inherently volatile, and countering this volatility necessitates time. While stocks generally provide returns greater than other asset classes like bonds, the price fluctuations require recognition and strategic planning. An analysis of U.S., Hong Kong, and A-shares from historical data underscores this point, revealing substantial differences in bull and bear market performance. For example, from 1927 to 2023, the annualized return for the S&P 500 was 6%, with bull markets averaging 12.5% and bear markets returning -11.2%. Meanwhile, A-shares exhibited even more extremities, with the Shanghai Composite Index yielding an annualized return of 10% during its bull markets, which averaged 49.4%, and in bear markets, returned a disheartening -20.7%.Interestingly, while stocks experience considerable volatility over short periods, they demonstrate a smoothing effect on returns as holding periods lengthen. When we scrutinize various market index returns based on different holding periods, the probability of obtaining positive returns significantly increases with time. For instance, over a three-year holding period, the average positive return probability across major indices was around 65%. Extending this period to five years bumped the probability to over 80%. Notably, after holding for close to a decade, the likelihood of achieving positive returns rises to more than 90%.3. Influencing Factors behind Stock Market ReturnsHaving explored the returns, we should investigate what fundamental factors drive asset prices in equity markets. Macroeconomically, stock returns are closely intertwined with the rate of economic growth. An analysis comparing stock return indices and GDP growth globally reveals a cogent relationship: countries that experience robust economic expansion tend to enjoy higher stock returns. For instance, in fast-growing economies like Mainland China, Taiwan, and South Korea, their stock market indices have recorded annual growth rates aligning closely with their GDP growth rates of 9%, 10%, and 11%, respectively. Conversely, countries like Japan and the UK have shown lower stock yields consistent with their sluggish GDP growth.On a microeconomic level, stock market profitability arises largely from company earnings and dividends. Using John Bogle's decomposition model of equity returns, we can analyze the distinction between investment returns and speculative returns across American and Chinese A-share markets. Historical data suggests that since 1900, the investment return in U.S. equities remains consistently strong at around 9.5%, driven primarily by dividend yields and profit growth. In contrast, speculative returns exhibit high volatility, averaging a mere 0.1%, further rattling investor confidence.Simultaneously, we observe that A-shares present similar broad patterns but with more pronounced volatility in earnings and speculative activity. The annualized growth in the CSI 300 index stands at 9.6%, bolstered mainly by corporate profits and dividends, though with considerable fluctuations reflective of emerging market characteristics.4. Equity Funds as Instruments for Sharing Market ReturnsFor individual investors aiming to capitalize on long-term stock market gains, utilizing equity funds represents a crucial strategy. As we juxtapose active versus passive fund management in U.S. and A-share markets, significant disparities surface regarding outperforming indices. For instance, in the U.S., active funds struggle to exceed benchmark performance, a trend emerging distinctly over the past decade with passive strategies increasingly gaining traction. Data from Visual Capitalist showcases an alarming trend: between 2001 and 2023, active funds managed to outperform the S&P 500 Index in just a mere three years.This discrepancy can largely be attributed to the high concentration of institutional investors in U.S. markets, hovering around 50%. This institutional dominance renders the playing field more competitive, making it increasingly challenging for active managers to generate alpha consistently against a backdrop of efficient market pricing.Furthermore, the fee structures in the U.S. emphasize this divergence, with actively managed funds often imposing management fees averaging around 0.65%, compared to a mere 0.05% for passive funds. The preference for cost-effective investment options has led to a massive surge in the scale of passive investments, highlighting the attraction for both retail and institutional investors alike.In the Chinese A-share landscape, a different narrative unfolds where active funds have historically outperformed. Between 2004 and 2023, equity-focused funds have consistently yielded higher returns than benchmark indices, largely attributable to the unique structure of the market with a predominance of retail investors compared to institutional players. Yet, this competitive edge may gradually diminish as institutional participation rises.This upward trend is evident, with institutional investment ratios gaining momentum in recent years. The Chinese A-share market is in a developmental phase, compared to the mature structure observed in the U.S., indicating a gradual evolution towards a higher institutional investment share.Caution: The anticipated growth of the Chinese economy and stock markets may not align with projections, demanding vigilance from investors moving forward.