Capturing the rewards of capitalism

Category: Investment Insight, News

At its simplest, investment is about capturing the rewards owed to you for providing your capital to others.  There are two key ways to do this.  The first is by lending your money to a company or government (owning bonds).  The second is to provide capital to companies in return for shares and receive the rewards of being a part owner (owning equities).

Figure 1: Participate in the rewards of capitalism.

 

The outcomes a bond holder will experience will tend to be much narrower than the outcomes that an owner of shares will experience. It is this greater uncertainty that delivers the higher expected returns of equities over bonds.  The figure below compares monthly after-inflation outcomes of shorter-dated, higher-quality bonds against those of global equities.

Figure 2: Equity outcomes are less certain than bond outcomes 2/1955 to 3/2024.

If we take each of these after-inflation monthly returns, we can calculate the annualised after inflation returns (i.e. per annum) that the lenders and the owners would have received over these 69 years or so.

Figure 3: Annualised after-inflation returns (% p.a.) of lending and ownership 2/1955 to 3/2024.

As you can see from the figure below – using these numbers – £100 invested in the equity of companies grew to more than £2,800 in purchasing power terms.  On the other hand, as a lender £100 became £225.  Due to the power of compounding over time, what seems to be a four-fold difference between the rewards of being a lender and those of being an owner, ends up as a more than twelve-fold difference over the period.

Figure 4: Growth of £100 of purchasing power from lending and ownership 2/1955 to 3/2024.

Conclusion

The key to successful investing is to get the balance between bond and equities right, given your circumstances. Thereafter you want to pick up as much of the return on offer by investing in low-cost, systematic funds seeking to deliver market returns.  Finally, it requires patience and fortitude to weather any market storms along the way.  The rewards of capitalism are there for those who can wait.

Risk warnings

This article is distributed for educational purposes only and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy, or investment product.  Reference to specific products is made only to help make educational points and does not constitute any form or recommendation or advice. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

Use of Morningstar Direct© data

© Morningstar 2024. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied, adapted or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information, except where such damages or losses cannot be limited or excluded by law in your jurisdiction. Past financial performance is no guarantee of future results.

Data series used: LENDER: From 2/1955 UK cash to 1/1970, Albion UK Short-Dated High-Quality 2.5 years Bonds (proprietary) to 8/2016, Bloomberg Global Aggregate Bond Index 1-5 (hedged to GBP) thereafter, in GBP adjusted for UK RPI. OWNER: 2/1955 Fama/French US Large Cap Research Index to 1/1970, MSCI World thereafter, in GBP adjusted for UK RPI.

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