≡ Menu

UK historical asset class returns

UK historical asset class returns with income reinvested

Here’s some handy data on historical asset class returns for the UK. The graph (right) shows UK asset class returns with income reinvested since 1899, as calculated by Barclays for its Equity Gilt Study 2016.

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

A couple of things to note:

  • The graph shows nominal asset class returns – that is the returns include inflation, which doesn’t really make you any wealthier.
  • The huge 2008/9 bear market and others seem irrelevant on such a long-term graph, yet such corrections are painful at the time and can last for years.

Key to the strong growth we see in this chart is the reinvestment of income.

If you don’t reinvest income – perhaps because you’re quite reasonably spending it to support a modestly lavish income in your old age – then those stupendous returns come down significantly.

Below is the same chart – again in nominal terms – without income reinvestment.

Long-term nominal returns without income reinvestment (Source: Barclays)

Nominal returns without income reinvestment (Source: Barclays)

The graph shows that the value of equities just roughly keeps pace with inflation in capital terms over most of this particular time sequence, once income reinvestment is taken out of the picture.

It’s a striking difference – check out the scale, as well as the grey price line – though I’d caution that it shouldn’t be taken to mean that dividends are always of supreme importance compared to capital gains, or some of the other excessively strong interpretations you’ll hear of such data.

Sure, if you don’t reinvest income then your returns will be much reduced.

But shares that pay no dividend might be expected to grow more rapidly in price terms to compensate.

Also, if you spend a significant amount of your return – whether that’s by spending your income or by selling down capital and spending the proceeds – then of course your long-term return will be reduced.

Dividends are important – but they’re not magic!

It’s also worth noting how poor the return from gilts has been over the very long-term, particularly in the context of how unusually strong they’ve been over the past couple of decades.

You have had to reinvest your income with gilts just to keep up with inflation.

Beware of inflated expectations

These are fascinating graphs, particularly if you’re a teenager who plans to live to a hundred and you don’t care about inflation for some reason.

For the rest of us, it’s more useful to look at historical asset class returns in real terms (i.e. inflation-adjusted) as is shown in the following table:

UK real asset class returns (% per annum)

2015 10 years 20 years 50 years 116 years
Equities (shares) -0.1 2.3 3.7 5.6 5.0
Government bonds (Gilts) -0.6 3.0 4.3 2.9 1.3
Corporate bonds -0.5 1.8
Index-linked bonds -3.4 2.5 3.8
Cash -0.7 -1.1 0.9 1.4 0.8

Source: Barclays Capital Equity Gilt Study 2016 (where no data is available, there is a gap).

The table shows real returns – the annual rate at which the asset class grows (or shrinks) over any particular period after inflation.

For instance, if inflation is 3%, then your money needs to grow by at least 3% nominal to keep up with this 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 can be misleading to look at just the last couple of years of asset class returns when you’re deciding how to invest over the long-term.

Only cash and very short-term government bonds provide a sure return over the near-term.

Returns from other asset classes are volatile, so their brief history gives you no useful information

Shares may do very well one year and bonds do poorly. The next year the returns may be different, or it may take years before their relative performance changes.

Nobody can know for sure.

But over the long term – such as three or four decades of saving into a pension – the compounding power of the higher return from shares compared to bonds and cash usually wins through.

This makes different assets 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. Bonds are also used to dampen down the volatility of your portfolio, according to your risk tolerance.1
  • Shares are best for long-term investing, since they deliver the highest real returns over longer periods. Adding new money regularly, holding for many years and reinvesting the income can help you manage the volatility.

By owning 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. This dampens the ups and downs of your portfolio’s value.

Rebalancing can also help smooth out the zigging and zagging of the different asset classes.

The price you pay for this reduced volatility is a potentially lower overall long-term return, because your holdings of lower risk assets like bonds and cash will typically deliver far less in the way of gains than shares.

For that reason, if you’re investing for the long-term into a pension, say, it may make more sense when you’re young to regularly put new money into shares alone, and to ride out the volatility to maximise your returns.

But whatever you do, never take more risk than you’re comfortable with. Always think about your personal risk tolerance.

And remember that a stock market crash can hit you hard if it strikes as you approach retirement.

Returns and tactical asset allocation

A final and riskiest option in deciding how to allocate your money is to take a view on what assets look cheap and expensive at any point in time.

You can then tilt your portfolio to try to capture a reversion to the mean – that is, towards the average historical returns we saw above.

I do this to some extent (I don’t currently hold any gilts, for instance) but I wouldn’t recommend it unless you’re sure you can avoid following the crowd, and you understand that poor calls could cost you money.

Wealth warning: There’s no proven method for forecasting long-term stock market returns. Studies have shown even the best predictive metric (the longer-term PE ratio) can only explain about 40% of future returns.

Anyone can see that different asset classes have good and bad years – it’s obvious from tables of discrete annual returns.

But timing when reversion to the mean will happen is very different from just predicting it will happen someday.

So where do we stand today versus the long-term returns?

At the time of writing, the historical real return from UK government bonds (i.e. gilts) over the past couple of decades still looks out of whack with the long-term average.

Indeed the real return over the past 20 years of 4.3% from gilts is higher than the 3.7% from UK shares.

This doesn’t make much sense. Investors would normally expect a higher return for holding volatile assets such as shares instead of bonds.

Sure enough, that’s what you see in the table above if you look back over:

… 50 years, during which time gilts returned 2.9% per annum in real terms, versus 5.6% from shares.

… 100 years, during which time the real return from gilts was just 1.3%, which was trounced by 5.0% from shares.

It seems likely that the financial crisis and the subsequent monetary easing and low interest rates from Central Banks have pushed the 35-year old bull market in bonds to a (final?) flourish of strong returns.

Gilts returned 16.4% in real terms back in 2014 alone – a year in which most market experts (and virtually all Monevator readers who left comments on this site) considered gilts very expensive, and not worth owning.

I didn’t own any either, so I’m not being smug. Trying to time these asset classes is much harder than it looks.

Remember: Missing good years like 2014 for gilts due to a misfiring tactical allocation strategy means you will need to do even better in the future to make up for the foregone returns.

Here’s one we did earlier

These things do tend to sort themselves out over time – even if such a reversion feels unthinkable at any given moment.

Just look at the following table from the 2010 edition of the Barclays report:

1899-2009: 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 .

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

Indeed equities were showing a very unusual negative real return over the decade to 2009.

As I wrote in the 2010 version of this article:

UK shares have struggled to advance over the past 10 years, as the markets have been felled by the dotcom crash and the financial crisis.

  • 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.

We all know what happened next. The FTSE-All Share rallied nicely for several years, and you did even better with reinvested dividends.

Yet in 2009 in the midst of the greatest buying opportunity for a generation – and with the table above showing how badly shares had done for a decade – buying them was not easy whatever anyone says now.

Many people had sworn off shares for good by 2009.

But you should never say never again if you want to be a successful investor.

Note: Comments below may refer to a previous version of this article, so please check their date.

  1. A young and brave investor might hold no bonds at all. A typical 65-year old might be advised to have 50-70% of their money in bonds. []

Receive my articles for free in your inbox. Type your email and press submit:

{ 64 comments… add one }
  • 1 Lemondy March 10, 2010, 11:52 pm

    Great to see these numbers laid out, thanks a lot!

  • 2 The Investor June 5, 2012, 4:23 pm

    @Daniel — You might enjoy this overview of historical UK house prices.

  • 3 stipe123 May 12, 2015, 10:17 am

    “In fact, the real return from 1899-2014 of 5.1% from gilts is higher than the 4.6% from UK equities.”

    Should this be the last 20 years?

  • 4 The Investor May 12, 2015, 10:53 am

    @stipe123 — Eek, typo catch of the day! Thank you! 🙂

  • 5 FinancialWalker May 12, 2015, 1:34 pm

    Great article. I’m struggling to find the yearbook PDF on the website (I remember struggling last year too). Does anybody have a direct link?

  • 6 Mathmo May 12, 2015, 2:51 pm

    A superb subject, TI, and one well worth the revisit.

    +1 to what @Brodes wrote — the RPI line on a “real” graph is flat — otherwise it needs to appear on the first graph.

    And the line in the text about the real return on gilts being 1.3% over 100 years doesn’t seem consistent with the “real” graph which shows the line ending below where it was on the left. 1.3% over 100 years is a 3.6-fold increase. TI — perhaps one just to check and clarify on? Taken out inflation just the once? Mathematician available for hire if you need one… 😉

    [EDITOR’S NOTE: I have since corrected the graph, as discussed below. 🙂 — The management ]

    I agree with almost everything here (apart from the blatant tilting advocacy*), but there’s a couple of observations that I made as I read it:-

    i) Cash and bonds are the same thing with different term-lengths. They are both government-backed debt with a promise to repay. Typically cash is held as a loan to a bank which is mostly underwritten by the government (beyond this amount bonds offer slightly more credit-risk security).

    Whilst being a “shock-absorber” is one way to think of these, that misses the rebalancing yield. They are a place to store wealth while equities get cheap.

    ii) On the terror of stock-market losses on “approaching” retirement. Retirement is a point of inflection in the investment profile, but it’s the 10 years after retirement which have a bigger impact on portfolio survival. And for MMM, TEA etc retirement doesn’t seem to be so much a point as a rather blurry phase. Probably considerably less scary what the markets do with that approach. Retire early: be less scared of retiring. Win win.

    * it’s important to acknowledge that active management isn’t bad because you can’t have a good guess at what happens next, it’s because it’s expensive. if you can guess cheaply, then tilt away. Also, hypocritically: I too have dumped gilts.

  • 7 L May 12, 2015, 3:47 pm

    Thanks for the update TI.

    Two questions:

    1. How did you get hold of a copy of the survey? Is there a link available to request a copy? (the Barclays website is quite confusing!)

    2. Is it just a coincidence that the “Telegraph’s” tables look an awful lot like yours? (scroll to the bottom) http://www.telegraph.co.uk/finance/personalfinance/investing/11477122/Historys-lesson-for-Isa-investors-Barclays-Equity-Gilt-Study-2015.html

  • 8 magneto May 12, 2015, 4:42 pm

    What an excellent data-rich article. One worth the re-visit from time to time.
    Even though a log scale is being used, and dividends being re-invested, would have thought stocks in 2008/9 when they lost about 50% from peak to trough, would have shown up as something more than a squiggle on the real return chart.
    Certainly didn’t feel like a mere squiggle at the time!

  • 9 Tim May 12, 2015, 4:49 pm

    The averages for cash seem awfully low, in my opinion. I have been investing in cash consistently for the past 18 years and have always been able to achieve at least 5% before inflation, even during the last few years of record low interest rates. At one point I was even getting around 6% in a cash ISA. It is worth bearing in mind that right now you can get 5% gross in a current account, albeit with a restriction on the balance of £2500, but that doesn’t stop you from opening multiple accounts.

    So, if I can get 5% during a period of record low interest rates, it sounds feasible that, including period of sky high inflation such as the early 80’s and 90’s, the long term average return on cash would at least be higher than 1%

  • 10 The Procrastinator May 12, 2015, 8:05 pm

    OK , all you mathematical geniuses and statisticians, please can you drill down to some really plain English for me! I’ve recently retired and have just transferred one of my pension pots into a SIPP and it’s sitting in cash while I sit like a rabbit in the headlights. In fact, I’m embarrassed to say that, in all, I’m around 70% in cash waiting for the big slide/correction/Armageddon! I thought it would be as easy as Lifestrategy 60 or a few good Distribution/Cautious Funds but with all the current warnings against bonds it makes more sense to me to use cash as my buffer and go 100% equities – or am I being really naive (or just plain stupid!)? Just for the record I have about a 3-4 year buffer in Cash Isas but may need to take some income from the SIPP for a year or two till an annuity kicks in and tides me over till I’m eligible for the State Pension in around 7 years. So, I’d be interested and grateful to know how TI’s research and graphs pan out for me. Bonds or no bonds – that is the question!!

  • 11 Ric May 12, 2015, 10:04 pm

    Hi The Procrastinator
    Lots of people will have different opinions, but no one can know, and IMHO it’ll be important to make up your own mind. I’m in a similar position with a cash lump sum due soon. I’d think about your attitude to risk (both in the traditional price volatility sense, but also in terms of guarding your income against potential harm from inflation). Think of your monthly income requirements and about your plan-B if your investment plans don’t work out. Consider the option of investing your cash pile in smaller chunks over a period of months or a year, to smooth out pricing risk. Naturally keep costs low. And read a lot, both here, on other blogs, and in books. Don’t believe anyone who sounds cock-sure they have the answer, especially if there is a fee attached! Sorry if this was grandmother & eggs (I think it was, but there you go).
    Ric

  • 12 dearieme May 12, 2015, 10:15 pm

    “With dividends re-invested”: I assume that they’ve ignored CGT throughout on the capital growth – what did they assume about income tax on dividends? And on the coupons of gilts?

    (The latter one is tricky: I can remember that when Woy Jenkins was Chancellor he introduced a retrospective extra tax on Gilt income so that a high-income investor might find herself paying more than 100% income tax at the margin.)

    What’s a reasonable subtraction to make for the costs of running equity investments from now on? Presumably platform charge plus the investment manager’s charge – so, say 0.35% p.a.? That might be about 10% of the dividends I suppose.

  • 13 The Investor May 13, 2015, 12:32 am

    @All — Guys, I’ve botched my description of the second graph. I’m not sure how I managed to do this without noticing it before the comments here, but as John says it’s *nominal* returns. It was a bit of a ‘doh’ moment when someone point to the retail price line today when I was out and about and checking comments on mobile.

    My feeble excuse is it’s come about because I’ve updated an old article with new data, and not been sufficiently attentive in the process to the graphics. (My brain doesn’t process charts/images so well!)

    I’ll fix the graph now and may republish again tomorrow with a note, as it’s obviously (rightly!) got a lot of people confused.

    Apologies. *blush*

  • 14 The Investor May 13, 2015, 1:08 am

    Okay, that graph part is fixed now. It was obviously wrong as soon as I looked again sitting here on the desktop Mac with my brain switched on…

    Three important lessons, the first of which is to pay more attention to pretty pictures, the second is which to be more careful when updating old articles, and the third is not to reply to comments blind on a mobile phone, as I think that my replies may have compounded the confusion.

    Apologies again.

    To answer some of other questions quickly as it’s 1am…

    …I don’t think the study is available on the Web. Note this is the Barclays Equity Gilt Study. The Yearbook is a different (and also very good) publication from Credit Suisse.

    @mathmo — I love your confession about gilts. I know the feeling. Perhaps it’s catching! 😉

    @L — The table is the same because the data is the same because it’s taken from the same study, which I have cited in the article.

    @david — My general point about geometric versus arithmetic means hold, but I made it blind trying to answer a question here about a graph that was not a graph of what I had said it was, without being able to see properly either the graph or the study (because I was on the tube, on my mobile!) So while it’s a useful subject to think about, I think it’s all added to the confusion here. In fact I’m likely going to delete my comments in a moment for that reason.

    @Tim — These studies use cash as accessible by institutions. I fully agree private investors can (and should!) take advantage of much higher rates that we can get in various ways.

    @dearieme — Yes, they don’t include tax in the return calculations. That’s standard with all this sort of stuff, since tax rates vary so widely both from person to person and over the era. Obviously for us in the real world taxes are of prime importance, but there’s really no other way to approach data like this sensibly, and leave it any useful state.

    @all — On reflection I may delete some of your comments about the graph confusion. This is not to try to cover up my cackhandedness — I confess, effusively — but rather because it’s just going to confuse future readers of this page for months/years to come.

    Don’t mistake that for not being really grateful that the mistake was spotted by you guys. Again, thanks to everyone who did. (I just wish I’d put this live on a working from home day! 🙁 Cheers!)

  • 15 Neverland May 13, 2015, 8:27 am

    @Procrastinator

    Just set up the direct debits to dribble the cash into equity and bond etfs and funds over a period of two years

    If you don’t do this the probability is that it will all be sitting in cash in two years time

  • 16 Dawn May 13, 2015, 10:17 am

    Rightly or wrongly ive no bond allocation. just cash and equities.
    Im working on a 3% REAL return in 10 years time from my total pot.
    If its any more and id be delighted!

  • 17 Tim G May 13, 2015, 1:20 pm

    @Procrastinator “I’ve recently retired and have just transferred one of my pension pots into a SIPP and it’s sitting in cash while I sit like a rabbit in the headlights. In fact, I’m embarrassed to say that, in all, I’m around 70% in cash waiting for the big slide/correction/Armageddon!”

    I sympathise. It’s quite easy to be dismissive of market timing while you are drip feeding (and some years from retirement). Quite another matter when there is so much talk of bond bear markets and equity crashes, and you have to make a one-off decision with a large amount of money. At that point, the fact that your pot is presumably the fruit of just such drip feeding seems irrelevant!

  • 18 dearieme May 13, 2015, 2:33 pm

    What the second graph now says is that if you spend your (after-tax, after-charges) dividends, the capital value of your shares (ignoring CGT) will as often fail to keep up with inflation as succeed, based on that 115 or so years’ worth of data. I wonder how many investors know that? You have to ignore capital taxes, income taxes, and charges just to get around a 50% chance of matching or beating inflation. And that’s in a country that had no catastrophes of the sort that afflicted most of the Continent or Japan.

    Put otherwise; the years since about the second Thatcher election have been atypically successful for equities. And it’s not just the two phases of the German War, and the years in between those phases, that were bad for the real value of equities; the socialist years of Heath-Wilson-Callaghan were bad too.

    On t’other hand the dividend-spender is likely to be retired, so that a performance of keeping up with inflation far better than bonds do may be adequate for her needs. Anyway, what the devil else are widows to invest in?

    Anyway, thank you for putting up this excellent plot. Sobering, innit?

  • 19 Raj May 13, 2015, 3:24 pm

    So, when the investment industry and a lot of financial writers dismiss cash and virtually worthless as an investment or as a defensive strategy, should we ignore them and grab cash ISAs, high interest current accounts or whatever is on offer anyway?

    It would be very interesting to compare the actual historical “consumer” rates of return for “cash” versus gilts, especially if you were to discount fees and trading costs from the gilt return. I would hazzard a guess that “cash” would win.

    Am I and some other contributors to this site in a huge minority in actually valuing cash over gilts?

  • 20 Topman May 13, 2015, 3:51 pm

    @dearieme

    “Socialist” Heath? Had he been, we would not have had to endure the miners’ strikes, the three-day week and the ensuing hung parliament that ultimately brought Harold Wilson to power.

  • 21 Ric May 13, 2015, 4:14 pm

    @dearieme
    “… the capital value of your shares (ignoring CGT) will as often fail to keep up with inflation..”, “…. Sobering, innit?”

    Flipping sobering. I’d always worked on the rule of thumb that equities underlying mean value would grow in proportion to overall growth in earnings per share, and that earnings growth would in turn be proportional to overall growth in GDP (after making allowances for the fact that UK companies get a proportion of earning form overseas), and finally that GDP would generally be ahead of inflation (as shown by the general trend for the standard of living to improve from one generation to the next). I’ve no figures for this, so assume the chart must be right and my suppositions wrong.

    Ric

  • 22 Neverland May 13, 2015, 4:21 pm

    @dearieme

    “What the second graph now says is that if you spend your […] dividends, the capital value of your shares […] will as often fail to keep up with inflation as succeed, based on that 115 or so years’ worth of data”

    What else would you expect a basket of shares to achieve over the course of 115 years?

    A share is just the acquired right to a bunch of future dividends after all

    The key variables are:

    – amount of savings
    – income length of retirement
    – spending

    I don’t think asset allocation, in the bounds of convention, matters that much

    So…go trap those snails in the back garden for supper right now

  • 23 magneto May 13, 2015, 5:05 pm

    @mathmo
    “Cash and bonds are the same thing with different term-lengths. They are both government-backed debt with a promise to repay.”

    See where you may be going with this, but for us cash is a very different asset class to bonds. Cash must provide instantly available funds (tho a small penalty may be incurred for early withdrawal).
    Cash is not truly cash if locked up for a fixed period without any early redemption option; then maybe is more bond-like?
    It is the interim price volatility of bonds that sets them apart from true cash, and becomes very much an issue should the need arise to sell before maturity at unfavourable prices.

    @The Procrastinator
    ” In fact, I’m embarrassed to say that, in all, I’m around 70% in cash waiting for the big slide/correction/Armageddon!”
    Fret not, we in mid-retirement are presently very cash heavy, basing this decision on mechanical responses to stock and particularly bond valuations. Fortunately much of this cash in the old NS&I IL Certs (great cash investment even with the current dismal reinvestment rate of RPI inflation plus 0.05%).

    One method recommended by some (which moves the debate on from lump sum versus £CA) of getting into a hot bath, is to set a target, then move only 10% of the way to target per month/quarter.

    @All
    Have always taken the conservative assumption that stocks only provide a yield plus inflation protection. Seems this assumption is not too wide of the mark!

  • 24 magneto May 13, 2015, 5:11 pm

    Just to clarify :-
    “One method recommended by some (which moves the debate on from lump sum versus £CA) of getting into a hot bath, is to set a target, then move only 10% of the way to target per month/quarter.”
    I.E. 10% of the noted deviation from target at the end of each month/quarter.

  • 25 dearieme May 13, 2015, 8:45 pm

    “What else would you expect a basket of shares to achieve over the course of 115 years?” See Ric’s comment just above yours.

    “Socialist” Heath? Yup, after a brief spell of claiming to be something else he caved in. Pathetic, really.
    I thought at the time I’d never see worse PMs than Heath and Wilson, but Blair showed how foolishly optimistic I had been.

    “Am I and some other contributors to this site in a huge minority in actually valuing cash over gilts?” While I can get 5% p.a. at TSB I value cash over short-dated gilts yielding under 0.5% p.a. And as a small investor my money at TSB has deposit protection. I think the point is that the institutional investors can’t earn much on cash, the poor lambs.

  • 26 Mathmo May 13, 2015, 10:49 pm

    @magneto – I like to think of cash as a bond with a zero-day redemption date* (“I promise to pay the bearer on demand”). Since the capital value of bonds moves proportionally to their redemption dates, there is no interest rate exposure on this sort of bond.

    Ultrashort bonds don’t move around much either. Cash is just a special case of an ultrashort bond.

    The security differs — but for most investors, both gilts and small amounts of cash on deposit are government-backed. Both carry some interest return. Both are affected by inflation.

    You are right that you need to match future liability dates to asset maturity dates and cash is pretty handy for imminent liabilities.

    What’s the point of this? The point is that asset allocation is not just about the size of the bond portion but also the distribution of term-lengths.

    * technically no redemption date, but daily holder-side calls on the debt.

  • 27 The Procrastinator May 13, 2015, 10:55 pm

    @ Ric
    My only worry about eggs is having too many in the one basket! I do follow several investment sites and Monevator has certainly been a breath of fresh air. The only thing is, there is sometimes too much information out there, often pulling in different directions – Decisions, decisions!

    @ Neverland
    “Just set up the direct debits to dribble the cash into equity and bond etfs and funds.
    If you don’t do this the probability is that it will all be sitting in cash in two years time”

    You understand the mind of a Procrastinator! Yes, I will definitely be investing, it’s just the Bond element I’m unsure of.

    @ Tim G
    “At that point, the fact that your pot is presumably the fruit of just such drip feeding seems irrelevant!”

    That’s a bit of reverse psychology! Makes me feel better knowing I got it right on the way in and hope I can do the same on the way out.

    @ Magneto
    I’ve only just taken early retirement and will be delighted, but very surprised, if I am still cash heavy in mid-retirement!

    Thank you all for your comments.
    I’m happy to drip-feed and have a few funds in mind, none of which include a significant bond element. I just wondered if perhaps I should include a Strategic Bond Fund in the SIPP as that is the only kind that seems to be in favour at the moment??

  • 28 dearieme May 13, 2015, 11:28 pm

    “perhaps I should include a Strategic Bond Fund in the SIPP”: I find the charges from that sort of active fund to be high. As ever, I’d be more attracted to an ETF – say, of short-dated corporate bonds. Or, as in fact we are at the moment, more attracted yet to cash. But that we hold outside our SIPPs. For this purpose my wife is a tax-shelter.

  • 29 The rhino May 14, 2015, 8:17 am

    Are these cash current acc s really any use to anyone. That tsb one for example has a 2k limit. Seems a lot of hoops for almost no capital. The only one that’s nearly useful is Santander 123. The rest are a joke. There’s an article on Mse on moving it round them all. It’s so complicated it almost reads like a joke

  • 30 Neverland May 14, 2015, 8:32 am

    @Procrastinator

    50/50 bond equity is a sensible enough default

    You can just use Vanguard funds or etfs

    It isn’t really an optimal portfolio but it’ll be very low cost and will produce top of the third quartile returns most years

    To be honest unless you have a huge portfolio you are better off thinking about how to reduce your living costs rather than worrying about how to get an extra 1% a year from your portfolio

    Most “investment advice” that isn’t about minimising costs is just white noise

  • 31 SemiPassive May 14, 2015, 9:06 am

    Much as I resent having to pay active managed fees, the yield on Jupiter Strategic bond outweighs the fees, especially comparing net yield to short dated bond etfs.
    I do favour cash to bond funds generally at the moment, but at least within my SIPP a strategic bond fund serves a role. But drip feeding in from a standing start so even if it gets whacked by some bond meltdown it will even out Ok.

  • 32 dearieme May 14, 2015, 10:46 am

    “That tsb one for example has a 2k limit. Seems a lot of hoops for almost no capital. The only one that’s nearly useful is Santander 123. The rest are a joke.” You rich people may reasonably feel like that; we poor folk needn’t.

    ” There’s an article on Mse on moving it round them all. It’s so complicated it almost reads like a joke”: perhaps that’s because many people at MSE are a bit dim.

  • 33 The Rhino May 14, 2015, 11:15 am

    I’m not sure its a rich vs poor issue – I think its an admin vs return issue

    take the TSB acc, you put in the full whack of 2k, get 5%, pay basic rate tax say

    so for the effort of opening the acc and making sure you have the right amount of money going in and out each month (£500) and ensuring you have the correspondence settings correct you make £80 a year

    Is the return juice worth the admin squeeze? I would say no regardless of how rich or poor you are. The same is true of all the others, possibly not the Santander one as I mentioned but its still borderline

    I think my argument is that these current accs are really a gimick that not only cannot be expoited by institutional investors but can’t really be exploited by the man on the street either (without incurring a horrendous admin burden) The rates look good, but the absolute returns are capped very low

  • 34 Naeclue May 14, 2015, 11:38 am

    I have been investing directly in gilts for over 20 years. Throughout that time I have rarely seen an article saying “Now is a good time to buy bonds”, but the gilts have kept on delivering and protected my portfolio after the dot-com boom and financial crisis, allowing me to rebalance into equities at lower valuations. Despite my past experience I have reluctantly come to the same view of others posting here, that now is not a good time to be buying gilts. I have decided to hold onto my current gilts with maturities ranging from 6 to 12 years until January when I rebalance. I will then sell my shortest dated gilt and move it to cash unless the yield on longer dated gilts has improved by then. The logic runs like this – at the moment Treasury 4 1/4% 2027 has a GRY of 2%. if in 7 years time (my usual holding period for a gilt) the GRY is zero, my internal rate of return would work out at 3.4%. In other words, 3.4% is the best return I can get over 7 years unless 5 year gilt yields are negative at the time I come to sell. However, I can get 2.21% on 2 year deposits from Paragon Bank and with the new rules on interest, the first £1000 of interest will be tax free. It is also now possible to move into cash ISAs from stocks and shares ISAs, with 1.5% on offer for instant access from NS&I. With FSCS guaranteed returns of around 2.2% on 2 year cash available, the return on 12 year gilts does not seem to be worth the additional risk.

    I would be very wary of anything calling itself a “Strategic Bond Fund”. That means the manager will be ducking and diving, burning your money in transaction fees. What bond duration will you be investing in and what credit risk will you be taking? Impossible to predict. Actively manged bond funds charge too much as well. A 0.75% TER on a fund that might have a long term real return of 2% at best right now will mean that the fund manager is taking 37% of your return. In addition there are tricks that can be played to enhance the yield figures on bond portfolios, such as taking fees from capital, selling options and favouring high coupon bonds, all of which burn capital to give the impression of high returns. It is a bit like spending 2% of your cash each year and saying your cash is giving you an income of 4%. In fact, doing just that would probably be a better thing to do right now than buying a “Strategic Bond Fund”.

    Procrastinator, having 70% in cash is fine at the moment. Inflation is barely touching it and bond/equity markets are hardly at bargain levels. Work out what longer term asset allocation you want/need and then move into it over 6 months. Waiting for a crash before investing is pointless. Even if it comes you may find yourself reluctant to invest in fear of markets going even lower. Concentrate on working out what you want to invest in and making sure you are with the right broker(s) to invest with long term, rather than what the level of markets are.

  • 35 Di May 14, 2015, 12:59 pm

    What a very well made point. It has always struck me as completely pointless to pay someone fees for managing a low paying bond, while cash is both more liquid and free.

  • 36 The Investor May 14, 2015, 1:16 pm

    Remember that for UK government bonds and other very-near risk-free government bonds you can just buy the bonds directly and hold them until they mature. This gets rid of manager fees altogether!

    See: http://monevator.com/buy-gilts-directl-or-invest-in-a-gilt-fund/

    I hear what people are saying about cash, which is a discussion we’ve had many times before. I have sung the praises of cash many times, and as I say it’s what I hold (along with a menagerie of P2P, preference shares, retail bonds etc) instead of UK government bonds currently:

    http://monevator.com/cash-and-your-portfolio/

    However please do remember that we live in very unusual times due to very low rates. Normally it is a mistake to consider cash and bonds as near interchangeable asset classes, and that may yet prove to be the case this time, too.

    http://monevator.com/cash-bonds-different/

    If we see even 3% on the 10-year I’d be sorely tempted to switch some cash back into gilts, personally.

    As for rate-tarting and so on, I agree there are diminishing returns at play, but it’s hard to complain about the effort of opening a Santander 1-2-3 account where you can easily make c.£600-800 or so a year on £20k, depending on cash back possibilities. (Ignoring the £2 a month fee).

    Also, as I said above and others have mentioned, institutions don’t have these options with cash on deposit, and I don’t think it’s really sensible to berate the study for using the broadest cash returns over the 115 years period.

  • 37 The Investor May 14, 2015, 1:30 pm

    I don’t agree with this:

    What the second graph now says is that if you spend your (after-tax, after-charges) dividends, the capital value of your shares (ignoring CGT) will as often fail to keep up with inflation as succeed, based on that 115 or so years’ worth of data. I wonder how many investors know that? You have to ignore capital taxes, income taxes, and charges just to get around a 50% chance of matching or beating inflation.

    While I agree that you have to think about taxes and so on, (a) the same is true of cash and (b) the data does not describe what you say it does.

    The table of returns I’ve featured in the article shows clearly that over the long-term equities have returned on average over 5% a year as a real return (i.e. after inflation).

    Cash returned less than 1% real on average.

    That is FAR more attractive than that casual glance at the graph implies.

    As I said in some of my deleted comments, you must remember this graph is a geometric return series over *some particular* 115 year period. If you started at different periods, you’d get very different results.

    It’s useful to get a sense at one glance how money does or doesn’t hold its value, but not much more than that.

    Moreover even on the graph’s own terms, remember it is a log scale. What looks like a small advantage for equities over inflation (blue line over grey line to the right hand side) is actually quite a big advantage.

    Some more data might help.

      The study says that £100 invested in equities 1945, without reinvesting income, would have at the end of 2014 been worth £9,148 in nominal terms, or £261 in real terms.

      £100 in gilts since 1945 would have turned into £65 nominal, or £2 in real terms.

      It doesn’t give cash, but I think it’d be even lower.

    Reinvesting income makes a big difference — equities, bonds and cash multiply respectively to £5,118 / £221 / £178 in real terms when you reinvest the income.

    Given all this data I think it’s pretty clear that the accepted wisdom that equities is much better than cash over the long-term is entirely accurate.

    Also, even on the pure capital terms, I don’t think turning £100 into £261 after-inflation is a terrible result, given all the income that would have been thrown off throughout. You’ve enjoyed a high and massively growing income and far more than maintained the value of your capital.

    If you did that in retirement you’d be thrilled (and Thomas Piketty wouldn’t — it’s basically his whole beef…)

    I appreciate it might be helpful to have some of this extra data in the article, but I’m not sure how much it’s fair to quote/use, given someone else did all the hard work creating the study. 🙂

  • 38 The Rhino May 14, 2015, 2:05 pm

    Yes, to be fair, I think the Santander 123 sneaks into the ‘worthwhile’ category if you have a spare 20k cash lying about

    the cashback is tiny compared to the interest on a 20k lump so not worth it just for that

    even better if you can pay no tax on the interest- maybe possible for pretty much everyone from next year with new conservative policy

    the switching service is awesome – very quick and does all the admin for you – no direct debits were harmed in any way – all transferred correctly

    the rest aren’t worth it IMHO

  • 39 dearieme May 14, 2015, 2:32 pm

    “so for the effort of opening the acc and making sure you have the right amount of money going in and out each month (£500) and ensuring you have the correspondence settings correct you make £80 a year”

    We have four of these accounts, find the interest welcome and the admin trivial. How hard is it to set up a handful of standing orders?

  • 40 Neverland May 14, 2015, 3:00 pm

    @Dearieme

    We have at the last count just under 20 different financial services providers, £320/year isn’t a sufficient inducement to add another 4

  • 41 Ketan May 14, 2015, 3:26 pm

    Let’s look at in another way, are you so well off that you can turn down £320 for, at most, an hour’s work? I know I’m not.

  • 42 magneto May 14, 2015, 4:51 pm

    @The Investor
    “If we see even 3% on the 10-year I’d be sorely tempted to switch some cash back into gilts, personally.”

    Yes that sums up the position well.
    It is not that the cash holders here are necessarily anti-bonds, but that they are not pro-bonds regardless of price.
    If remembered correctly long term inflation is about 3% or 3.1%.
    So real yield on 10 year gilts is 1.98% – infl = minus 1.02%
    Aha some may say, but RPI is only running at 0.9% (don’t take any notice of CPI as gilts and NS&I products are based on RPI (for now)).
    Even Mark Carney concedes that by the time the oil and food price decreases fall out of the yearly inflation figures late 2015, we will see higher inflation, but maybe not back to the long term average.
    Aha others may say, but cash is also giving a negative real yield on this basis. Yes but cash is usually a short term holding, with the most of the monies destined for stocks and bonds in the longer run.
    The snag with holding gilts today, is that if stocks dive from current slightly expensive levels, the investor might — repeat might — be selling the gilts at a loss, to move into stocks. Cash would in this scenario at least avoid this volatility risk/loss.
    Personally can hardly wait to get the cash invested!
    If inflation does pick up the cash will become a drag on portflio performance.
    So roll on +ve real yields on gilts!

  • 43 The Rhino May 14, 2015, 5:32 pm

    heres the link:

    http://www.moneysavingexpert.com/savings/savings-loophole

    difficult to know whether to laugh or cry? Is anyone here undertaking this venture?

    I like MSE a lot but this fails Pareto’s rule quite badly for me (i.e. 80% of results come from 20% of the effort) – as does a lot of the content over there

  • 44 Mathmo May 14, 2015, 6:04 pm

    I’ve been thinking this afternoon about whether Corporate bonds can represent a good move for the gilt-shy. I like Santander123 and Zopa but these require breaking funds out of the wrapper, and I can’t quite bring myself to do it (despite the net-of-tax yields being better, I think the temptation to “accidentally” spend funds is high; it goes against my every sinew to be a net withdrawer from the most flexible tax-shelter there is; and the ability to rebalance back into stocks is limited). Furthermore Zopa loans are clearly at the junkier end of credit.

    On Corporates, the yield is better but is being paid-for by the additional credit risk — why not go the full JNK? Or emerging market debt? Or the roulette table? Where does the yield/risk creep end? This is after-all the counterweight part of the portfolio.

    Individual retail bonds are fascinating (I dare you to spend an hour on the sterling yield map and not be drawn-in) but they feel terribly risky: what chance do I have of assessing the creditworthiness of a single issuing company? A fund spreads the risk and you can get 303bp (net) in SLXX large cap. But that has an effective duration of 9 years — and assuming the spreads stay the same — are subject to the same discount that will hit gilts if interest rates drift back to historical normality.

    Interestingly, you can buy the corporate spread above gilts (ie short gilts, long SLXX) in a hedged bond fund — SLXH yields 125bp net (the difference being about the 10yr gilt yield). Effective duration: 9 days. That’s considerably better than ERNS at 79bp net, but I can’t figure out if this is just correlated to equities but with lower yields…

    How can the gilt-shy store wealth inside a tax-wrapper without getting killed on yield?

  • 45 Tim G May 14, 2015, 7:32 pm

    @Mathmo “I’ve been thinking this afternoon about whether Corporate bonds can represent a good move for the gilt-shy.”

    They look tempting (at least compared to gilts) when you focus on returns. My concern would be how well (or badly) they perform as a store of value. I’m still waiting for the Investor to offer analysis and open comments on the asset class return post from March (see below). One of the many interesting points that struck me from the table there was that, when UK equities took a 30% hit in 2008, UK investment grade corporate bonds also fell by 10%:

    http://monevator.com/15-year-table-of-uk-asset-class-returns/

  • 46 Mathmo May 14, 2015, 8:04 pm

    Precisely my concern. I’m starting to realise I was chasing yield, and chasing yield is for suckers.

    The alternative class:-
    — Got to be uncorrelated.
    — Ideally low volatility / small drawdowns / good store of wealth
    — Some yield – ideally at or over the riskfree rate.

    Oh god – it’s gilts.

    *goes to the casino*

  • 47 dearieme May 14, 2015, 9:07 pm

    @TI: ” this graph is … useful to get a sense at one glance how money does or doesn’t hold its value, but not much more than that.”

    I disagree: a good diagram is much more revealing in many ways that a jumble of numbers in tables. (The fact that diagrams are particularly revealing is why scientific papers are full of them.)

    Just consider a youngish woman in 1914: the preceding 15 years have been the last spell of free-market capitalism before the slaughter commences. Her husband’s capital will have grown in real terms because (we assume) he’s reinvested his dividends. He joins his regiment and marches off to his death. Happily he was well off: unusually for those days she puts the lot (after death duties) into equities. She lives off the dividends (after income tax, fees and charges). Magically, she is so well advised that she manages to avoid capital gains taxes throughout (it means high trading charges but she pays those out of her dividend income; she pays her advisers out of the income too.) So: when does her capital return to its 1914 value in real terms? Apart from a fleeting moment, she has to wait until 1959! A forty-four year wait: and we’ve pretended that she’d avoided capital taxes, remember.

    In the unlikely event of the poor dear surviving until 1970 she’d face another decade and more of falling behind inflation.

    Now it’s true that if she’d inherited in 1930 she’d have done better, as the graph reveals. (What have you got against graphs? A picture is worth a thousand tables.) And had a younger widow inherited in 1975 she’d have done terribly well. So far.

    (Though the wonder that was Ted Heath’s years would have cost her late husband a pretty penny.)

    But my point is that share hucksters do tend to concentrate on the good spells and, let us remember, concentrate overwhelmingly on the US and UK markets, neither of which suffered catastrophes caused by war. The plots for Belgium, or Italy, or Japan, or Austria would look very different. Or Germany or Russia, etc etc. How can we be confident that we won’t be Italy next time? The answer is we can’t.

    Still, gilts would have been far worse. Property for letting would probably have been far worse too, after Lloyd George’s Rent Act, and its successors, would have confiscated much of the value of her properties. So much for diversifying across assets. Diversifying across markets would probably have done worse, because Italy.

    This investing lark can be a good deal less remunerative than its keener proponents let on: certainly less remunerative if you don’t reinvest the dividends, and don’t somehow trade to mimic the stock market (which itself causes costs that may not be negligible, especially for a small portfolio – stamp duty, spreads, brokers’ charges).

  • 48 dearieme May 14, 2015, 9:13 pm

    ” £320/year isn’t a sufficient inducement”: yeah, buying a short-dated gilt in an S&S ISA could earn that much at a cost of only £80,000.

  • 49 The Investor May 14, 2015, 9:28 pm

    @Tim G — Yes, as a rule of thumb corporates are like rubbish equities. 😉

    See this post from a long time ago, and some other corporate bond posts in the series (box top right):

    http://monevator.com/what-are-the-benefits-of-corporate-bonds/

    Regarding the tactical asset class returns follow-up, yes, I do need to get on with that you’re right! 🙂

  • 50 @algernond May 15, 2015, 3:54 pm

    What about short-term (1-5 year) investment grade corporate bond funds though – would they be classed as rubbish equities? These must have less risk than broad duration bond corp. funds, and appear to have better yield than short-term government bonds.
    (I still want to use IS15 instead of ERNS for my next SIPP bond allocation!).

Leave a Comment