When deciding if it is best to invest in shares or bonds the only reliable information available is historical. The long established warning that past performance is not a guide to future results applies. That said the latest Barclays equity study (2018) does make interesting reading.
First some brief (basic) definitions. Equities are shares in a company. Bonds are effectively a loan to businesses or governments. Both Bonds and Equities can be traded on a stock market. Their value may rise or fall on that market.
The value of a bond must be repaid to the lender at some specified point in the future. They also receive a regular fixed interest payment. Assuming a company is profitable then Equities (also known as shares) receive dividend payments.
The Barclays study shows that, in the long run (over 118 years), UK Equities have outperformed Gilts (A Gilt is a Bond issued by the UK Government). Showing a return of 5.1% pa vs 1.3% pa (after inflation).
However, this is not the case over every time period. In 3 out of 11 ten year periods since 1907 Gilts outperformed Equities. Notably two of the decades where Gilts outperformed equities were 1997 to 2007 and 2007 to 2017.
The very low interest rates since 2008 and quantitative easing have boosted the returns from Gilts. Though 2017 has seen a reversal of fortunes for bond investors as interest rates started to rise.
After deflating the nominal returns using the Retail Price Index calculated by the Office for National Statistics then real investment returns by asset class (a minus means effectively lost money) shows:
2017 Last 10 years
Cash -3.9% -1.9%
Equity 8.4% 3.2%
Gilts -1.9% 4%
Today’s value of £100 invested in 1990 (with reinvestment of income) would be worth – UK Equity £466, Gilts £409
Making Comparisons With Property
Some compare investment in residential property and buy to let with investing in assets such as Gilts and Equities. There have been four periods of rapid real growth in house prices since the late 1950’s the last of which was 1998 to 2007. Each of these periods was followed by a correction with a pronounced decline in prices (Halifax housing market review). However, since 2010 they roughly kept pace with inflation
Direct comparison of the returns from Equities and Bonds with buy to let investment is difficult as it depends on a wide range of factors including occupancy rates. Residential property cannot be held directly in a personal pension although commercial property can.
So the answer to the question is it best to invest in shares or bonds is (frustratingly) it depends. Past performance is a matter of fact, future performance depends on a wide range of political and economic factors. Investment returns are closely related to the risk any individual is prepared to take and their capacity for loss.
All that can be done is to retain a balanced portfolio that matches the desired risk profile. Stay close to trusted advisers. Take a long term view and don’t let short term panic force decisions that may be regretted in the long term.
The purpose of this blog is to provide technical and generic guidance and should not be interpreted as a personal recommendation or advice’.