Why do certain asset classes perform the way they do?
One of the lessons gleaned from long-term studies is that stocks have historically outperformed bonds. Not necessarily over the course of a year, or even a decade. But over the long run, stocks have beaten bonds.
Why is this? The answer is simple. If a lender agrees to lend his money to someone at, say, 5%, then they probably have a strong belief that the borrower can return better than 5% with it. Not only that, but the borrower believes that as well. In the aggregate, it makes sense that both parties will be right. It’s win-win. While it’s true that the lender would be fine with the money not coming from future cash flow, they’d probably feel a lot better that it does.
This comes back to my point about the difference between equity and assets. An asset is just a thing like gold or copper or even a house. But equity is a working business that takes assets to make a product. Copper is just a rock (ok, ok, an element). It just sits there. In 1,000 years, it’s still the same thing. Only when people come along can copper be employed to do something useful.
A bond is an asset as well. Remember that a stock can buy a bond, but a bond can’t buy a stock. You can form a company that does nothing but buy bonds, and then float stock to fund your operations. You can use the dividends from the bonds to buy even more bonds. In fact, you can take it one step further and borrow money to buy more bonds. Of course, you’d want to borrow at the lowest possible rate (in the short term) and invest at the highest possible rate (the long term).
Another name for this bond-business is called a bank.
My point is that equity is completely different from other classes of investments. It’s the only one that captures human ingenuity, which is the ultimate asset.
Now I don’t necessarily agree completely with what Cullen Roche says. Every asset class such as equities, bonds, commodities and even cash does have its day. It depends which stage of the economic cycle we have reached, especially the rate of economic growth and inflation. There have been long periods during which bonds have outperformed equities for example but over the long term, equities outperform all other assets for the reasons given by Cullen Roche. His words have particular resonance right now.
We have been through a torrid period of time over the last ten months with the coronavirus pandemic and over the last four and a half years with post-Brexit uncertainty but things are certainly looking a lot more positive now.
There is a lot of government financial support which typically precedes a growing stock market. The UK stock market has been under a hangover ever since Brexit but there is now light at the end of the tunnel.
So if you share my optimism, do invest in UK shares. The best way to do it, of course, is to invest in the CCM Intelligent Wealth fund managed by our sister company Minerva Money Management and/or our newly launched discretionary fund management service with Transact. You know it makes sense*.
*The value of your investments can go down as well as up and is not guaranteed at any time.
The contents of this blog are for information purposes only and do not constitute individual advice. All information contained in this article is based on our current understanding of taxation, legislation and regulations in the current tax year. Any levels and bases of and reliefs from taxation are subject to change.