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# 4.3.1 Historic returns: proof that the time horizon is crucial

You have already learned that risk also relates to the length of time of any investment. Normally, the longer someone intends to invest without needing to sell, the more risk can be afforded. Table 4.4 uses past data to show how likely it is that the shares will beat cash deposits or gilts as an investment over two different time periods or horizons – five years and ten years, without withdrawing any money, that is, allowing for compounding of interest.

Time period assets held 5 years 10 years Percentage of times equities outperformed gilts 72% 79% Percentage of times equities outperformed savings accounts 75% 91%

The probability (from 0–100%) is based on the number of periods in which equities outperformed either cash or gilts expressed as a percentage of the total number of periods between 1899 and 2015. Therefore, if we consider all possible five-year time periods between 1899 and 2015, there were 112 of them. For those 112 time periods, equities outperformed cash deposits 84 times, giving a probability of 84/112 × 100 = 75%. For the ten-year periods, the outperformance rate was even higher – 91% against cash deposits.

So, past evidence suggests that the longer the time period, the more likely it is that equities will outperform bonds and cash – assuming that past returns are good predictors of the future. Studying the past seems to say that, with as short a time horizon as five years, there is a three-in-four chance of doing better if you held all equities rather than all bonds or all cash deposits. With a ten-year time horizon, there is more than a nine-in-ten chance of doing better with equities than with cash deposits. Put another way, the risk of underperformance with an equity portfolio over ten years is less than 10%.

History would seem to suggest that someone is unlikely to lose when investing in equities compared with buying bonds or putting their money in a savings account. Nevertheless, the past would not have been a good forecast of the future if someone had been investing £1000 for ten years in 2000. This was the start of a bear market with share prices falling for a sustained period. The FTSE All Share Index started 2000 just below a value of 3000. By September 2010, the index stood some 100 points lower at just under 2900. The investor’s £1000 would have fallen to £967. This highlights that the probabilities in the table above are calculated over a very long time period and may not take into account more recent changes. Consequently, the past is not necessarily always a good indicator of a particular future.

## Update to 2023

Sadly we cannot provide the findings from editions of the Barclays Equity Gilts Study for recent years. Despite requests Barclays state that the study is now only available to its ‘institutional clients’.

What we do know, however, is that after 2015 equities performed well until the global markets were hit by the COVID-19 pandemic in 2020. These years also saw bond yields and interest rates falling to historic lows in the UK. This was good news for bond investors given the inverse relationship between bond yields and bond prices. By contrast it was bad news for savers as interest rates on cash investments were very low.

After the pandemic and since 2021 interest rates and bond yields have increased in the UK – so good news for savers and bad news for those who bought bonds in the years immediately prior to 2022. By contrast, following a recovery after the pandemic, the UK equity market has been directionless with the FTSE 100 index largely remaining no higher than seen in the late 2010s.

Over the very long-term, though, equities are the winner with an average 5.1% compound annual rate of return in the 118 years after 1899.