Personal finance: Time to take notice as gilts slay the giant

WHAT do 1921, 1982 and 1998 have in common? As far as I know, the only connection is these are the only three years since 1918 when ultra-safe government bonds - gilts - have won the annual investment contest with shares.

Last year's victory for gilts was the financial equivalent of Preston North End beating Manchester United. In 1998 the overall return from shares in the FT-SE All Share index was 10.6 per cent. Not bad, but gilts romped home with an amazing 21.7 per cent return.

It seems you shouldn't assume shares will outperform other investments. But that's what we have been taught to believe, and the history of the 20th century bears it out. Since 1918, shares have averaged an 8 per cent return every year while gilts have averaged just 2.4 per cent.

If you (or rather, your great-grandfather) had put pounds 100 into shares in 1918 and reinvested all the income, it would be worth just over pounds 1m now. The same money put into gilts would now be worth pounds 13,315. (Thanks, great- grandpa.)

So what's suddenly got into gilts? The economists at Barclays Capital, who come up with these figures in an annual study, are as astonished as the rest of us. It's not that shares did badly, it's just staggering to see gilts doing so well.

The Barclays Capital study puts a considerable part of the change down to a large working population saving more cash for retirement than ever before. Gilts are the ultimate safe investment. But as more of us save even more cash for retirement, and interest rates drop even further, the yields on offer will go down. The returns from both shares and gilts will fall and the gap between the relative returns is likely to narrow.

All this should set you thinking about the make-up of your retirement portfolio (and see page 18 for more advice on how you may be running your own retirement investments if the Government's new retirement savings plans get the go-ahead).

There's no reason to stampede out of shares, but there may be a long- term argument for switching more money into bonds and gilts. And the extra depressing part is we'll all have to save more than ever if we want a decent life in retirement.

The bright hope in all this is corporate bonds. Bond funds are the investment of the moment, and rightly so. Barclays' study shows that corporate bonds returned 18.8 per cent in 1998.

The bank concludes that there is plenty of scope for UK companies to raise more cash through corporate bond issues, and it believes bonds are undervalued compared with shares and gilts.

Corporate bonds are riskier than UK government bonds but, with interest rates at 5.5 per cent and still dropping, it's becoming increasingly hard to find decent returns without an element of risk.

From April, the tax breaks on shares held in PEPs become less attractive than those on bonds. So if you are still looking for a home for your last PEP, a corporate bond fund is worth investigating.

i.berwick@independent.co.uk

Start your day with The Independent, sign up for daily news emails
News
newsAnother week, another dress controversy on the internet
Life and Style
Scientist have developed a test which predicts whether you'll live for another ten years
health
Life and Style
Marie had fake ID, in the name of Johanna Koch, after she evaded capture by the Nazis in wartime Berlin
historyOne woman's secret life as a Jew in wartime Berlin
News
news... and what your reaction to the creatures above says about you
ebooks
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Recruitment Genius: Customer Service Advisor

£15000 - £16000 per annum: Recruitment Genius: A Customer Service Advisor is r...

Ashdown Group: Trainee Consultant - Surrey / South West London

£22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...

SThree: HR Benefits Manager

£40000 - £50000 per annum + pro rata: SThree: SThree Group have been well esta...

Day In a Page

The difference between America and Israel? There isn’t one

The difference between America and Israel? There isn’t one

Netanyahu knows he can get away with anything in America, says Robert Fisk
Families clubbing together to build their own affordable accommodation

Do It Yourself approach to securing a new house

Community land trusts marking a new trend for taking the initiative away from developers
Head of WWF UK: We didn’t send Cameron to the Arctic to see green ideas freeze

David Nussbaum: We didn’t send Cameron to the Arctic to see green ideas freeze

The head of WWF UK remains sanguine despite the Government’s failure to live up to its pledges on the environment
Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Set in a mythologised 5th-century Britain, ‘The Buried Giant’ is a strange beast
With money, corruption and drugs, this monk fears Buddhism in Thailand is a ‘poisoned fruit’

Money, corruption and drugs

The monk who fears Buddhism in Thailand is a ‘poisoned fruit’
America's first slavery museum established at Django Unchained plantation - 150 years after slavery outlawed

150 years after it was outlawed...

... America's first slavery museum is established in Louisiana
Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

The first 'American Idol' winner on how she manages to remain her own woman – Jane Austen fascination and all
Tony Oursler on exploring our uneasy relationship with technology with his new show

You won't believe your eyes

Tony Oursler's new show explores our uneasy relationship with technology. He's one of a growing number of artists with that preoccupation
Ian Herbert: Peter Moores must go. He should never have been brought back to fail again

Moores must go. He should never have been brought back to fail again

The England coach leaves players to find solutions - which makes you wonder where he adds value, says Ian Herbert
War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

The battle for Mosul will unleash 'a million refugees'

Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn
Yvette Cooper: We can't lose the election. There's too much on the line

Yvette Cooper: We can't lose the election. There's too much on the line

The shadow Home Secretary on fighting radical Islam, protecting children, and why anyone in Labour who's thinking beyond May must 'sort themselves out'
A bad week for the Greens: Leader Natalie Bennett's 'car crash' radio interview is followed by Brighton council's failure to set a budget due to infighting

It's not easy being Green

After a bad week in which its leader had a public meltdown and its only city council couldn't agree on a budget vote, what next for the alternative party? It's over to Caroline Lucas to find out
Gorillas nearly missed: BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter

Gorillas nearly missed

BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter
Downton Abbey effect sees impoverished Italian nobles inspired to open their doors to paying guests for up to €650 a night

The Downton Abbey effect

Impoverished Italian nobles are opening their doors to paying guests, inspired by the TV drama
China's wild panda numbers have increased by 17% since 2003, new census reveals

China's wild panda numbers on the up

New census reveals 17% since 2003