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When bonds beat shares

By Neville Bennett

Friday 21st February 2003

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Bonds outperformed shares on the London market over the past 16 years. Other things being equal, if an investor put, say, £1000 each into equities and bonds, the bond fund would now be greater.

That is significant as financial planners maintain a chant that equities are better performers in growing capital than fixed interest investments.

This often depends on carefully selected occasions. Yes, during the 1990s on the Dow and Nasdaq, though not on the NZSE40, not from 1986-2003 in London and not in the US from 1973-82.

It is difficult to make comparisons. Data on fixed interest is readily available for bonds and even for rates charged by solicitors on mortgages.

The greater problem is using share indices. Until recently there were no index funds, so investors could not buy the index.

Yet some people assume any share portfolio would have performed like the index. But that was impossible as no one could have bought the 40 largest shares and have changed their weighting each day.

Actually many portfolios were different and many investors were left with the Chases, Brierleys and Equiticorps that fell out of the index.

The index is composed of winners and does not correspond to the reality experienced by investors in the past.

So it remains difficult to compare returns, though less so in bear markets where equities wither and fixed interest produce steady returns.

Preserving steady returns on a stock of capital is crucial for the investor with responsibilities for goals in income, education, retirement and inheritance. And it is hard work and calls for great judgment.

The bear market calls also for vigilance. When the equity market is losing ground it is tempting to switch entirely to cash and fixed interest.

But as our survey showed (NBR, Oct 25), while the nominal returns were good after tax and inflation the real return was only 3-4%. Such a low yield could compromise goals.

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