Why it pays to be in stocks
Investors should tune out day-to-day noise and focus on the long-term trend, which means sticking with stocks and reinvesting your dividends.
Investors should always aim to tune out day-to-day noise and focus on the long-term trend. The annual Equity Gilt Study from Barclays is a big help in this context, and this year's edition highlights two important points.
Over both ten and 20 years, UK government bonds have achieved marginally higher returns than equities, which have gained an annual 3.2% over both time spans (in inflation-adusted terms). However, go back 50 or 118 years, and the picture changes. Shares have produced an average real return of 5.1% per annum since 1899, compared with 1.3% for long-dated gilts. Over 50 years, the respective figures are 5.6% and 3.1%.
"Bonds are just debt," as Neil Collins points out in the Financial Times vulnerable to political caprice and inflation. But equities are "stakes in rising prosperity", reflecting long-term profit and economic growth. So they are "ultimately more rewarding than lending to the government".
Lesson number two is that reinvesting your dividends is crucial to achieving healthy long-term returns. Today's value of £100 invested at the end of 1899 without reinvesting income would be just £203 in real terms.
However, if all income had been reinvested, the portfolio would have grown to £34,758. For £100 invested in 1945, meanwhile, today's real value with and without income reinvested would be £6,294 and £288 respectively.