Our backtest universe is a subset of companies in the Datastream database containing an average of about 1500 companies in the 17-country Eurozone market during our 12-year test period (13 June 1999 to 13 June 2011). We excluded banks, insurance companies, investment funds, certain holdings companies, and REITS. We included bankrupt companies to avoid any survivorship bias and excluded companies with an average 30-day the trading volume of less than €10 000. For bankrupt companies or companies that were taken over, returns were calculated using the last stock market price available before the company was delisted.

To create a market portfolio to compare our results against - remember we excluded certain types of companies - we constructed a market portfolio based on the 250 most traded companies in our test universe over the previous 30 days, weighted by trading volume in Euros. Each year on 13 June, the market portfolio was reconstructed with the then 250 most liquid companies, weighted by trading volume (average over the previous 30 days before 13 June).

As you can see below, our constructed market portfolio closely correlates with the EURO STOXX index, a broad but liquid subset of the STOXX Europe 600 Index. Over the 12 years of the study, the market portfolio generated a return of 30.54 % or 2.25% pa, dividends included.

The test period was most certainly not a good time to be invested in stocks.

The 12-year period we tested included a stock market bubble (1999), two recessions (2001, 2008-2009) and two bear markets (2001-2003, 2007-2009). Despite all the substantial movements, over the whole period, it was essentially a sideways market, as Vitaliy Katsenelson defined in his book, ‘The Little Book of Sideways Markets’. The tables below show the movement of the market portfolio over the 12-year time period we tested: