Share yields remain top but gilts return to favour

Investors have earned a much higher return from shares than gilts, and better protection from inflation too, over many years. Shares will continue to deliver the best results, but the relative performance of gilts is improving, according to a new study. Diane Coyle, Economics Editor, explores a prediction of investment nirvana.

Every year brings a striking reminder of just how well shares do as a long-term investment. pounds 100 invested in equities in 1945, with the annual income reinvested year by year, had grown to pounds 73,657 by December 1997, or pounds 3,372 adjusted for inflation, according to the annual Equity-Gilt Study by Barclays Capital.

By comparison, the total return on pounds 100 invested in gilts - bonds issued by the British government - was a meagre pounds 2,502 in cash terms or pounds 115 in real terms. The same amount held in cash was worth pounds 3,372 at the end of last year, or pounds 158 inflation-adjusted.

Taking account of basic-rate tax just emphasises the superiority of investing in shares. Adjusting for both tax and inflation since 1945, that pounds 100 had turned into pounds 1,417 for equities, pounds 31 for gilts and pounds 50 in a building society account by the end of last year.

Returns in all three categories have improved sharply since 1980, following the runaway inflation of the previous decade.

"The results confirm the importance of equities," said Michael Hughes, group economic adviser to Barclays Capital. A forecast in the 1992 Equity- Gilt Study that the FTSE 100 index would reach a level of 7,000 by the end of the 1990s still looked attainable, he said.

The catch with investing in shares is that the returns are far more volatile than those for "safer" investments. The explanation for their higher return is the greater risk involved.

Mr Hughes played down the danger of a stock market correction in the near future, a fear fuelled by the fact that share valuations are currently high by past standards.

"This begs the question of whether past standards are appropriate for the future," he said, noting that the US and UK stock markets had proved surprisingly resilient to events in Asia.

Both the prospect of inflation remaining low and the likelihood that dividends would grow at a rate faster than the long-run average of 2.2 per cent meant equities could continue to gain ground for some time, he argued.

However, he also said gilts were becoming more attractive relative to equities, with their returns starting to improve this decade after many years of decline.

Not only low inflation but also demographic shifts would boost gilts, for the proportion of middle-aged people saving for retirement is poised to increase during the next two decades.

The study predicted this could take gilt yields to the lowest for 50 years and increase their total returns. The risk premium on investing in shares will shrink, despite the prospect of a high valuation for equities lasting for some years longer.

Jacqueline Bisset has claimed that young women today are obsessed with being 'hot', rather than 'charming', 'romantic' or 'beautiful'
New Zealand fly-half Aaron Cruden pictured in The Zookeeper's Son on a late-night drinking session
Liam Payne has attacked the media for reporting his tweet of support to Willie Robertson and the subsequent backlash from fans
peopleBut One Direction star insists he is not homophobic
Arts and Entertainment
A bit rich: Maggie Smith in Downton Abbey
tvSeries 5 opening episode attracts lowest ratings since drama began
Arts and Entertainment
Ben Affleck stars as prime suspect Nick Dunne in the film adaptation of Gone Girl
filmBen Affleck and Rosamund Pike excel in David Fincher's film, says Geoffrey Macnab
Arts and Entertainment
Lena Dunham
booksLena Dunham's memoirs - written at the age of 28 - are honest to the point of making you squirm
Life and Style
fashionThe supermodel on her career, motherhood and Cara Delevingne
Life and Style
A new app has been launched that enables people to have a cuddle from a stranger
techNew app offers 'PG alternative' to dating services like Tinder
Greg Dyke insists he will not resign as Football Association chairman after receiving a watch worth more than £16,000 but has called for an end to the culture of gifts being given to football officials
ebooksAn unforgettable anthology of contemporary reportage
Arts and Entertainment
Jake Quickenden sings his heart out in his second audition
tvX Factor: How did the Jakes - and Charlie Martinez - fare?
premier league
Frank Lampard and his non-celebration
premier leagueManchester City vs Chelsea match report from the Etihad Stadium
Arts and Entertainment
Rachel, Chandler and Ross try to get Ross's sofa up the stairs in the famous 'Pivot!' scene
Arts and Entertainment
'New Tricks' star Dennis Waterman is departing from the show after he completes filming on two more episodes
tvOnly remaining original cast-member to leave crime series
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

iJobs Job Widget
iJobs Money & Business

COO / Chief Operating Officer

£80 - 100k + Bonus: Guru Careers: A COO / Chief Operating Officer is needed to...

Senior BA - Motor and Home Insurance

£400 - £450 Per Day: Clearwater People Solutions Ltd: **URGENT CONTRACT ROLE**...

Market Risk & Control Manager

Up to £100k or £450p/d: Saxton Leigh: My client is a leading commodities tradi...

SQL Developer - Watford/NW London - £320 - £330 p/d - 6 months

£320 - £330 per day: Ashdown Group: The Ashdown Group have been engaged by a l...

Day In a Page

A roller-coaster tale from the 'voice of a generation'

Not That Kind of Girl:

A roller-coaster tale from 'voice of a generation' Lena Dunham
London is not bedlam or a cradle of vice. In fact it, as much as anywhere, deserves independence

London is not bedlam or a cradle of vice

In fact it, as much as anywhere, deserves independence
Vivienne Westwood 'didn’t want' relationship with Malcolm McLaren

Vivienne Westwood 'didn’t want' relationship with McLaren

Designer 'felt pressured' into going out with Sex Pistols manager
Jourdan Dunn: Model mother

Model mother

Jordan Dunn became one of the best-paid models in the world
Apple still coolest brand – despite U2 PR disaster

Apple still the coolest brand

Despite PR disaster of free U2 album
Scottish referendum: The Yes vote was the love that dared speak its name, but it was not to be

Despite the result, this is the end of the status quo

Boyd Tonkin on the fall-out from the Scottish referendum
Manolo Blahnik: The high priest of heels talks flats, Englishness, and why he loves Mary Beard

Manolo Blahnik: Flats, Englishness, and Mary Beard

The shoe designer who has been dubbed 'the patron saint of the stiletto'
The Beatles biographer reveals exclusive original manuscripts of some of the best pop songs ever written

Scrambled eggs and LSD

Behind The Beatles' lyrics - thanks to Hunter Davis's original manuscript copies
'Normcore' fashion: Blending in is the new standing out in latest catwalk non-trend

'Normcore': Blending in is the new standing out

Just when fashion was in grave danger of running out of trends, it only went and invented the non-trend. Rebecca Gonsalves investigates
Dance’s new leading ladies fight back: How female vocalists are now writing their own hits

New leading ladies of dance fight back

How female vocalists are now writing their own hits
Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments