The annual Barclays Equity Gilt Study offers a reminder of two key investment principles. The first is to hold stocks for the long term, since they do better than bonds or cash. Since the end of 1899, UK equities have returned an average of 5% a year after inflation compared to just 1.3% for gilts and 0.8% for cash. Over 50 years, the figures are 5.6% and 2.9% respectively. Today's overpriced gilts are narrowly ahead over 20 years, but the odds of stocks outperforming gilts if you hold them for 18 years is 86%.
So it's important not to be panicked by a few bad years. Stocks' superiority over the long term makes sense because investors reap the benefits of a growing economy through higher company profits. Bondholders just get a fixed sum.
The second lesson is always to reinvest your annual dividend income: £100 put into stocks in 1945 would have grown to just £251 by now in real terms if you had relied only on capital gains. But with annual reinvestment it would have jumped to an inflation-adjusted £5,113 over 20 times more.
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