UK historical asset class returns

Here’s some handy data on historical asset class returns for the UK.

(You might also like my article on US historical asset class returns).

The graph to the right shows UK asset class returns with income reinvested since 1899, as calculated by Barclays Capital.

As you can see, equities (shares) have done much better than bonds over the long-term.

A couple of caveats:

These are nominal asset class returns – they include inflation, which doesn’t really make you any wealthier.

The huge 2008/9 bear market and others disappear into the upward march of equities, yet such corrections are painful at the time and can last for years.

Inspiring though the graph is if you plan to live to a hundred and don’t care about inflation, it’s more useful to look at historical asset class returns over shorter periods in real terms (i.e. inflation-adjusted).

UK real asset class returns (% per annum)

	2009	10 years	20 years	50 years	110 years
Equities (shares)	25.9	-1.2	4.6	5.2	5.0
Government bonds (Gilts)	-3.3	2.6	5.4	2.3	1.2
Corporate bonds	15.8	2.9
Index-linked bonds	3.1	1.9	3.8
Cash	-1.7	1.8	3.1	1.9	1.0

Source: Barclays Capital Equity Gilt Study 2010 (Note: Where data is NOT available, there is a gap).

The table shows real returns, which is the amount the asset class grows (or shrinks) over a period, minus inflation.

If inflation is 3%, then your money needs to grow by at least 3% nominal to keep up with this impact of inflation, after-tax.

i.e. You need a positive (more than 0%) real return to beat inflation.

Historical asset class returns: the long and short of it

It’s silly to look at just the last couple of years of asset class returns when you’re deciding what to invest in over the long-term,

Only cash and short-term gilts (UK government bonds) provide a sure return over the near-term. All other asset classes are volatile.

Shares may do very well one year, while bonds do poorly. The next year the returns may be different, or it may take a couple of years or even longer before their relative performance changes.

Over the long term – such as four decades of saving into a pension – the underlying traits of shares, bonds, and cash come to the fore.

What historical asset class returns mean for your investing

From the table, it’s pretty clear that different asset classes can deviate from their long-run returns for substantial periods of time.

Shares have struggled in the past ten years, for instance, after the markets fell in the wake of the dotcom bubble.

You wouldn’t normally expect shares to deliver a negative (-1.2% per year) real return over a decade, or for them to be beaten so handsomely by safe and secure Government bonds.

Over the long term such periods even themselves out, which is one reason why a strong decade for shares may follow the terrible 2000-2010 period. But there are no guarantees.

The takeaway is that different assets are good for different purposes:

Cash is king for short-term requirements, such as paying bills and saving a house deposit

Government bonds are most useful for planning outgoings in 5-10 years, since you can know the return you’ll get in advance so long as you hold them until they are redeemed.

Shares are best for long-term investing, since they deliver the best real returns over longer periods, and also because many years of holding evens out the volatility.

By holding a simple portfolio of different assets you benefit from diversification. When one asset class has a bad year, another one will likely have a good year, which dampens the ups and downs of your portfolio’s value, albeit at some cost to your overall returns.

If investing for the long-term into a pension, say, it may make more sense when you’re young to regularly invest into shares and to ride out the volatility to maximise your returns. But never take more risk than you’re comfortable with.

The final and riskiest option is to take a view on what assets look cheap and expensive at any point in time, and to tilt your portfolio to try to capture a reversion to the average historical returns we saw above.

I do this, but I wouldn’t recommend it unless you’re prepared to put a lot of work in and are sure you can avoid following the crowd. You also need to appreciate that poor calls will cost you money.