Are shares the best long-term buy?

The latest annual study from Barclays Capital suggests that shares generally outperform bonds and cash in the long run, says Martin Spring in the On Target newsletter. But there's still no guarantee of success - equities have been known to generate negative returns over periods as long as 20 years. And generating the best returns relies on one vital investment strategy...

By MoneyWeek

published 18 May 2006

in Features

Although US equities gave real returns averaging only 3.4% last year, over longer periods they continue to outperform other asset classes, Barclays Capital says in its latest annual study of shares and government bonds.

By contrast, UK equities delivered real returns of 18.9% last year. Their cumulative real return of 51% since the end of 2002 completely erased the losses caused by the tech stock crash.

Three lessons to be drawn from statistics in the study covering the past 105 years are:

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The longer you stay invested in shares, the better your chances of outperforming the major alternative asset classes bonds and cash. In the UK equities have outperformed government bonds in 80 out of 97 ten-year periods.
However, there is no guarantee, even over a period as long as 20 years, that equities won't generate negative returns. It happened in the last century, and could happen again. But that is "unlikely," says the study.
Reinvestment of dividend income accounts for most of the long-term real return of equities. In the UK, over 105 years, such reinvestment gross (assuming no tax paid on the income), raised the average annual real return from 0.65 per cent to 5.29 per cent.

Orbis says its Global Equity fund currently has a 44% exposure to Asian stocks, compared to a weighting of just 14% in its benchmark world index.

This is one of my favourite funds for investors who want a "buy-and-forget" exposure to world stock markets, with an annual return over the past three years averaging 41% in dollars, or double that of the MSCI World index.

By Martin Spring in On Target, a private newsletter on global strategy