by Nathan Glaister, financial planning consultant Armstrong Watson

Published at 14:09, Friday, 17 August 2012

Having worked in the financial services industry for several years, there was one common theory which I always believed.

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That was that investors who are prepared to take the risk of investing in assets such as equities, would be rewarded over time and the potential returns should be more attractive than investing in cash or fixed interest securities, including gilts.

In 2011, UK gilts (both fixed rate and index-linked) were the best performing asset class, and with the FTSE 100 still at a level well below its peak in 1999, it was interesting to look at some of the findings in the 2011 Barclays Equity Gilt Study – a publication continuously produced since 1956.

According to this study, between 1950 and 2011 UK equities delivered a real total return of just over six per cent per annum after inflation is taken into account. This compares to a real return on gilts of just two per cent annually over the same period.

Moreover, equities have only posted negative real returns in two of the last 11 decades, whereas gilts have posted negative real returns in five of the last 11 decades.

Going back even further, over the last 111 years equities have outperformed both cash and gilts 68 per cent of the time, if held for two consecutive years.

If the holding period is extended to 10 years, equities outperformed cash and gilts 90 per cent and 79 per cent of the time respectively, and 99 per cent and 88 per cent of the time if held for 18 years or more. Equities actually outperformed cash in 74 out of 111 years.

The study suggests that if you had invested £100 in 1899 with all income reinvested gross, your equity holding would now be worth £1,639,368.

The same amount invested in gilts over the same time frame would be worth £31,459 and for cash a mere £20,228. Please note these figures are not adjusted for inflation.

What is also clear from the study is the importance of dividends and the effect they have on total returns. Of the six per cent annualised total real return from UK equities since 1950, 4.5 per cent was directly attributable to dividends, with just 1.5 per cent being generated by capital growth.

Although equities appear out of favour for many retail investors, don’t write them off. As history shows, there is a good chance at some point they will bounce back, although this can’t be guaranteed of course.

There are investment funds available which invest in a wide range of assets that have more than doubled in value over the last 10 years – delivering significantly better returns than equity markets or cash, well in excess of inflation and providing investors with a real rate of return.

So, despite all the apparent bad news about markets and investments at present, perhaps investors should consider taking a more balanced approach to investing and seek professional independent advice, so that they have the opportunity to consider all the options available.

• Investment values can fall as well as rise and you may get back less than you invest. Past performance is not a reliable indicator of future results. For independent financial planning advice email moneytalk@armstrongwatson.co.uk or call Armstrong Watson on freephone 0800 195 2161.

Published by http://www.cumberlandnews.co.uk