Though past performance can never be a guarantee of future returns, an examination of past capital market returns does help to provide historical insight into the performance characteristics of various asset classes.
The below graph illustrates the hypothetical growth of a £1 investment in five asset classes, as well as inflation, over the time period January 1970 through December 2012. The results do not take into accounts taxes or transaction costs and so present a slightly rosy view of reality, but are useful nonetheless in their illustration of the historical volality and performance of various asset classes.
(Click graph to enlarge)
You can see the results for yourself, but here are some top-level observations:
- US small stocks were the top performer over the time period analysed.
- UK stocks outperformed US large stocks, domestic bonds and gilts over the same time period.
- UK inflation was also high until the 1980s.
- While domestic bonds and gilts provided lower returns when compared to US and UK stocks, they did so with less volatility (i.e. risk).
- Government bonds and gilts are guaranteed by the full faith and credit of the British government as to the timely payment of principal and interest, while stocks are not guaranteed and have been more volatile than the other asset classes.
- International investments involve special risks such as fluctuations in currency, foreign taxation, economic and political risks, liquidity risks, and differences in accounting and financial standards.
About the data
US large stocks are represented by the S&P 500® Index. US small stocks are represented by the Ibbotson® Small Company Stock Index. UK stocks are represented by the Morgan Stanley Capital International (MSCI) UK Index from 1970–1972, Morningstar calculated series from 1973–1985, and FTSE All Share Total Return Index thereafter. UK bonds are represented by the International Monetary Fund UK Long-Term Government Total Return Index from 1970–1975 and the FTSE Gilts All Stock Total Return Index thereafter, Treasury bills by the International Monetary Fund UK Treasury bill total return series, and UK inflation by the International Monetary Fund UK Inflation from 1970–1987 and UK National
Statistics thereafter. An investment cannot be made directly in an index. The data presented herein assumes reinvestment of income and does not account for taxes or transaction costs.
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