Stocks beat cash and bonds over the long term

Military women waving flags in WWII © Getty images
Equities shrugged off World War II

“Sad to say, most people are still keeping their money where it is least likely to do them much good,” says Ian Cowie in The Sunday Times. Three times more cash Isas than stocks and shares Isas were set up in 2017-2018, with £7.8m funnelled into cash and £2.8m into the stockmarket, notes Cowie.

Those who deposit money with a bank opt for a guarantee that they’ll get some interest and their money back. But in times when inflation has risen beyond the interest provided by most bank accounts, this will destroy your wealth. “With inflation outstripping cash Isa returns by about 2%, your £100,000 lump sum will fall to just £81,790 in real terms over ten years,” says Michael Martin of Seven Investment Management in the Financial Times. Every year, however, we receive a powerful reminder that equities are far more likely to produce high medium- and long-term returns than cash deposits – or lending to governments (which is also prone to inflation).

The latest annual Barclays Equity Gilt Study shows that since 1899 British stocks have returned 4.9% a year in real terms, compared to 1.3% for gilts and 0.7% for cash. Over the last decade, the respective figures are 5.8%, 2.7% and -2.5%. An investment kept for five years at any stage since 1899 has had a 76% chance of outperforming cash and a 72% chance of doing better than gilts. Extend the holding period to ten years and those figures climb to 91% and 77%.

The stockmarket continuously beats cash because shareholders own the companies that produce many of our goods and services, so they’re “likely to benefit from improvements in efficiency and inventions that occur over time”, says Cowie.As economies grow, their companies’ profits expand and an investor’s share grows with it. It’s the short-term volatility that puts investors off equities, but they should grit their teeth and ride it out. Despite some awful years, including two world wars and a depression, equities still came out ahead.

Income is crucial

If you’re worried about volatility, “calm yourself by thinking about the incredible power of dividends to alleviate market turmoil”, says Martin. Last year, the FTSE 100 index made zero share-price gains, but it delivered a 5% return from its dividends. The Barclays study also shows that reinvesting income dividends is crucial to healthy long-term returns. If you invested £100 in UK stocks at the end of 1945 without reinvesting the dividends, the amount would now be worth £244 after inflation. But with reinvested income the initial stake would have climbed to £5,573. It bodes well, then, that payouts kept climbing last year: the FTSE All Share dividend gained another 8% in 2018.


Silver will hitch a ride on gold

While gold has been rallying over the last six months, silver’s performance has been underwhelming. But this could soon change. “As investors’ appetite for gold improves, silver might share in the yellow metal’s prosperity,” says Myra P Saefong on Barron’s. Silver, like gold, is a monetary metal, deemed a safe haven and store of value. It tends to mimic gold’s movements but is typically more volatile as the market is smaller.

One “real risk” is inflation. says WIll Denyer of Gavekal Research. Investors are looking the other way thanks to the recent growth scare. But the outlook is improving and given the extremely tight labour market and rising wages, there is a danger that US “inflation and inflation expectations rebound to levels that are too high for comfort”. That would raise the prospect of higher interest rates, and “equities… are unlikely to respond kindly”. The possibility of further trade disputes worsening is another risk that could stoke demand for a safe haven.

Meanwhile, mine production is “stuttering”, with the largest silver mines seeing output drop by 9% last year, according to Ross Strachan of Capital Economics. So the demand and supply picture also bodes well. Silver is also an industrial metal and used in solar panels, which are a growing source of demand. Other areas using silver include medicine and electronics. Capital Economics expects the silver price to gain 16% by the end of the year.