UK asset class returns with income reinvested since 1899, best asset class to invest in calculated by Barclays for its Equity Gilt Study 2016. 9 bear market and others seem irrelevant on such a long-term graph, yet such corrections are painful at the time and can last for years.
Key to the strong growth we see in this chart is the reinvestment of income. The graph shows that the value of equities just roughly keeps pace with inflation in capital terms over most of this particular time sequence, once income reinvestment is taken out of the picture. I’d caution that it shouldn’t be taken to mean that dividends are always of supreme importance compared to capital gains, or some of the other excessively strong interpretations you’ll hear of such data. Sure, if you don’t reinvest income then your returns will be much reduced.
But shares that pay no dividend might be expected to grow more rapidly in price terms to compensate. It’s also worth noting how poor the return from gilts has been over the very long-term, particularly in the context of how unusually strong they’ve been over the past couple of decades. You have had to reinvest your income with gilts just to keep up with inflation. Beware of inflated expectations These are fascinating graphs, particularly if you’re a teenager who plans to live to a hundred and you don’t care about inflation for some reason.
Historical asset class returns: the long and short of it It can be misleading to look at just the last couple of years of asset class returns when you’re deciding how to invest over the long-term. Only cash and very short-term government bonds provide a sure return over the near-term. Shares may do very well one year and bonds do poorly. The next year the returns may be different, or it may take years before their relative performance changes. Cash is king for short-term requirements, such as paying bills and saving a house deposit. Government bonds are most useful for planning outgoings in 5-10 years, since you can know the return you’ll get in advance so long as you hold them until they are redeemed.
Bonds are also used to dampen down the volatility of your portfolio, according to your risk tolerance. Shares are best for long-term investing, since they deliver the highest real returns over longer periods. Adding new money regularly, holding for many years and reinvesting the income can help you manage the volatility. By owning a simple portfolio of different assets you benefit from diversification. When one asset class has a bad year another one will likely have a good year.