The Importance Of Reinvestment Of Income From Shares And Gilts

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The latest Barclays Equity Study (March 2017) provides some powerful information on the importance of reinvestment of income from shares (equities) and Gilts to long-term investment returns.

Shares pay dividends (assuming the company is able to pay those dividends) while Gilts (UK bonds) pay a set rate of interest. The dividends and/or interest may be withdrawn (in part or in full) or reinvested.

According to the Barclays Equity Study, £100 invested in Equities in 1945 would be worth £5,804 in real terms (after the impact of inflation is considered) today if all gross dividends had been reinvested. If the dividends had been consistently withdrawn in full over the same term the £100 invested would be worth £275 in real terms today.

On the same basis as above £100 invested in bonds in Gilts in 1945 would be worth £239 today in real terms based on reinvestment. If the interest had been withdrawn the £100 would be worth £1.88 in real terms today.

It is perhaps also important to note the significant impact of inflation. Based on the £100 invested in 1945 the nominal value of the Equities (assuming full reinvestment of dividends) would be £211,392. This falls to £5,804 in real terms today after the impact of inflation is factored in.

The above is based on a snapshot based on an investment made in 1945 and returns over various time periods are outlined in the full Barclays Equity Study. For example, over a 50 year period real investment returns show 6% per annum return on equities and 3.1% per annum on Gilts. However, over a 20 year period Gilts win out at 4.5% return per annum with equities at 3.7% per annum.

For those who have entered a flexi-pension drawdown arrangement, the above figures illustrate both the potential long-term impact of inflation and the value in leaving the capital sum intact and minimising withdrawals for as long as practical. Of course, the market conditions when a withdrawal is made can also have a significant impact on a funds value.

The information in this article does not constitute financial or other professional advice. You should not take action on the basis of this article without seeking regulated independent financial advice that addresses your specific circumstances.