- EQUITIES BEAT CASH OVER 20+ YEARS 100% of the time.
- EQUITIES BEAT BONDS OVER 20+ YEARS 99% of the time.
The evidence for this is using US based data as it’s the longest data set available for a developed market. The table below shows the probabilities of different asset classes outperformance over different time periods.
|Equities beat cash
|Equities beat bonds
|Bonds beat cash
Data source: Morningstar Direct. Indices used: IA SBBI US Large Stock TR USD, IA SBBI US IT Govt TR USD and IA SBBI US 30 Day T Bill TR USD. Data set January 1929 to February 2023.[i]
As 30 somethings cannot access their pension until age 58 (at the earliest), you’ll be invested in your pension for 20+ years. You’ll experience multiple equity market crashes in this time but the evidence of the past shows that you’ll be rewarded for your patience investing in equities. Past performance is not an indicator of future performance but it’s about all the information we have to go on.
It’s important you use a blend of growth assets (equities) and defensive assets (bonds and cash) that matches your risk profile. This will enable you to stay invested through the highs and lows of being an investor. Equities drive long-term investment returns. Bonds keep you in your seat by reducing the fluctuations of your overall portfolio.
A higher allocation to equities may the rational approach. However, one panicked sale at the bottom of an equity market crash can undo many patient years of investing.
You might want to read my blog on balancing risk and reward on how to assess your risk profile and allocate to equities and bonds.
Let’s look at what equities and bonds are.
What are equities?
Equities = stocks = shares. Equities are growth assets and are expected to provide an above inflation return on your investment over the long-term.
Having ‘equity’ is to own part of a company. Every company in a capitalist society (the developed world), exists to provide profits for its shareholders. You have the opportunity to own a small part of lots of great companies in your pension and benefit from the profits those companies make.
The long-term average annual return of a US large stock index (largest and longest dated data set) is above 10%.
What are bonds?
Bonds are issued by governments or corporations to raise money. They are a form of debt. Bonds are lower risk than equities because if a company goes bust, bondholders are paid out before shareholders. Bonds are sometimes known as fixed interest investments.
Bonds are issued at a set price known as the principal, for a set length of time, known as the term. While you own the bond, you will receive a coupon (interest) as compensation for lending your money. The price of a bond can fluctuate over the term. At the end of the bond’s term, the bond owner will receive repayment of the principal, assuming the lending institution can afford to repay.
The long-term average annual return of US government bonds with term of 5 years is around 5%.
What can you do about it?
- Take a risk questionnaire. A good starting point might be to take an attitude to risk questionnaire. Many employer’s pension providers offer their own risk questionnaire. For example, Aviva Royal London Standard Life. Based on the result of this and the other factors of KENCAT you should be able to come to a target ‘risk rating’
- Assess your current fund selection. Log into your pension portal and navigate to the investment fund factsheet for what you are currently invested in. There should be a clear asset allocation of growth vs dec
- Research the funds available. Select suitable funds that match your risk profile within your pension for your existing investments and also future contributions.
Take action today and your future self will thank you.
If this is all a bit much to take on, we review your existing pension and investment arrangements and recommend suitable investment funds as part of the MUVADO 100 Day Plan. If you’d like to explore if it’s time you took control of your finances, please book an initial call today.
Past performance is not an indicator of future returns. The indices used in this example are US based as they provide the longest historic returns and the largest data set. The data used is taken from Morningstar Direct and all rights are reserved to them.
Remember that when investing your capital is at risk. The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
[i] US data is used as it is the most reliable long-term set of data available. US represents c.60% of global equity markets and 38% of global fixed income, making it the largest contributor to both markets. A globally diversified investment strategy is part of MUVADO’s investment philosophy.