Learn from Past Financial Mishaps: Some Illustrative Instances of Financial Missteps Spanning Over Half a Century
In the world of finance, understanding the past can provide valuable insights into the present and future. Let's take a look at the historical performance of UK equities, gilts (government bonds), gold, and property from 1926 to 1976.
UK Equities (Stocks)
Over the 50-year period, equities delivered the highest real returns among these asset classes, with an approximate annual return of 6-7%. Despite significant volatility, including downturns during economic crises, long-term growth was strong. Dividend payments were a stable part of total returns.
UK Gilts (Government Bonds)
Government bonds provided lower returns than equities but with much lower volatility, offering a stable income and capital preservation. Real returns were helped by high nominal interest rates in the pre-World War II era and some inflation-protected aspects. However, an investor starting in 1926 had lost over 90% of their capital in real terms by 1976.
Gold
Historically, gold was a minor part of portfolios and was effectively fixed in price under the gold standard until 1931. From 1931 to 1976, gold prices were relatively stable until the gold market reopening in the early 1970s. Gold showed low or negative real returns for much of this period, but geopolitical risks pushed gold prices much higher in the 1970s.
Property (Real Estate)
Property investments typically showed moderate real returns around 3-4% per year, providing a stable income and some capital appreciation. Property returns had moderate inflation protection due to rising rents and asset values alongside inflation. During the mid-20th century, UK real estate markets were influenced by post-war rebuilding and urbanization.
Here's a summary table of the approximate average real returns from 1926 to 1976:
| Asset Class | Real Annual Return | Risk (Volatility) | Notes | |-------------|--------------------|---------------------|----------------------------------------| | UK Equities | 6-7% | High | Highest return, volatile, dividends | | Gilts | 2-3% | Low | Stable income, low risk | | Property | 3-4% | Moderate | Income & capital gain, inflation-linked| | Gold | ~0% (pre-1970) to high post-1971 | Low-Moderate before 1970, high volatility after | Store of value, inflation hedge, limited growth pre-1970 |
This summary is based on well-known financial research, particularly studies like those from Ibbotson and others who have documented long-term asset returns. For more detailed numbers, charts, or a breakdown by decade, specific data and explanations are available upon request.
Throughout this period, various investment strategies and trends emerged. For instance, Neil Woodford built a reputation at Invesco managing unit and investment trusts offering generous income. In 2014, GARS was launched in the wake of the 2008 financial crisis, aiming to offer investors hedge fund-like performance at much lower fees and with better liquidity.
In the world of technology, Lastminute.com, founded in 1998 as an online platform for unsold package holidays and hotel rooms, was sold for £76 million in 2014. The technology and communications sector came to comprise a significant portion of the S&P 500, but its earnings didn't match its market capitalisation, leading to adjustments in the subsequent years.
On the other hand, the cryptocurrency market, estimated at $3 trillion, is believed to be a bubble ready to implode by some. Meanwhile, Russia's use of bitcoin to pay troops has raised ethical concerns, as it may potentially keep troops fighting. Law-abiding people in law-abiding countries without exchange controls may not fully appreciate the attraction of cryptocurrencies.
As we navigate the ever-changing financial landscape, understanding the historical context of various asset classes can help us make informed decisions and prepare for the future.
- The historical performance of UK equities, from 1926 to 1976, showed an approximate annual return of 6-7%, making it the highest real return among the analyzed asset classes.
- Despite the high volatility, dividend payments in UK equities were a stable part of total returns over the 50-year period.
- Government bonds, like gilts, produced lower returns than equities yet offered a more stable income and capital preservation due to lower volatility.
- Property investments, during the same 50-year period, provided moderate real returns around 3-4%, providing a stable income and capital appreciation, with moderate inflation protection due to rising rents and asset values.
- Gold, despite a low return before 1970 under the gold standard, showed increased volatility and higher returns in the 1970s due to geopolitical risks.
- Asset allocation and investment trends include the rise of investment trusts, like those managed by Neil Woodford, and the launch of GARS, both aiming to offer lower-cost, more liquid hedge fund-like performance, and the growing significance of the technology and communications sector in the S&P 500, where earnings did not initially match the market capitalization, triggering subsequent adjustments.
