When cash and bonds yielded next to nothing, the case for investing in shares hardly needed making. This was the TINA era – there is no alternative. To earn a decent return, you had to take some equity risk.
Today, with bond yields in excess of 5% in many cases, and cash not far behind, fixed income investments provide a respectable, and seemingly safer, alternative to investors.
It is reasonable to ask why we should bother with the volatility and apparent risk of shares when there are other less obviously risky options on offer.
The short answer is that rising yields make bonds and cash more attractive, but they don’t undermine the case for continuing to hold a meaningful exposure to the stock market.
The more in-depth answer can be framed as seven reasons to stick with shares. Here they are:
1. Yield is not the same as return
Set against the near zero returns from bonds and cash that we got used to in the post-financial-crisis period, a 5% bond yield looks attractive.
But it is important to remember that this is a nominal contractual income. If inflation averages 3%, the real return is actually 2%. In the case of cash, a variable income could also fall if interest rates are cut.
Shares don’t offer a contractual fixed income, and they don’t provide a fixed capital return in the future. Instead, an investor owns a share of a company’s stream of profits. You hope that these will grow over time. So, the comparison is not simply:
5% bond yield versus, say, 2% equity dividend yield
But rather:
5% fixed nominal return versus (probably lower starting) dividend yield, plus long-term growth in earnings, plus long-term growth in dividends
The headline initial income yield is important – and it makes bonds and cash look more interesting than they did a few years ago – but it is just part of the story.
2. Bonds finance growth; shares participate in it
A bondholder lends money to a company for an agreed period. At the end of the loan period, they expect no more than their money back. In the interim they expect a fixed income to be paid.
A shareholder, by contrast, owns a part of the company they invest in. Because of this they participate in whatever increase in value the company creates.
Over time, economies tend to become more productive, and companies sell more goods and services. Prices also rise and companies are usually able to pass on higher costs. Profits rise. Dividends grow.
Equity investors get to share in this compounded growth. Bond investors do not.
3. Shares resist inflation; bonds are crushed by it
Bonds and cash feel safe because if you invest £100 in them you are very likely to get £100 back again in future. But that apparent safety does not tell the whole story.
The relevant question to ask of that £100 is what it might buy in 10 or 20 years. And the answer is very likely to be: a lot less than it does today.
The Rule of 72 tells you how long it will take for the purchasing power of your money to halve at a given inflation rate.
If inflation runs at 2% a year, it will take 36 years to reduce your spending power by half (72 divided by 2). At 3%, it will only take 24 years. At 4%, just 18 years.
According to the Bank of England, something that cost £1 in 1976 would set you back £7 today.
Inflation is the enemy of fixed income investments like bonds. The income they pay is fixed. So, too, is the capital they repay at maturity. This means there is no protection against rising prices.
Shares, by contrast, offer the possibility of rising dividend income over time and rising capital value too. There is no guarantee that either of these will rise at the same pace as inflation. But it is more likely than with bonds or cash.
4. Shares reward risk
If safe assets like bonds and cash offered the same expected return as shares, no rational investor would bother. Share prices would fall until the expected return compensated for the greater risk of loss.
This extra expected return is known as the ‘equity risk premium’. Historically, this has been substantial. The UBS Global Equity Returns Yearbook estimates that shares have delivered around 4.6 percentage points a year more than cash since 1900.
Looking forward the estimated risk premium has fallen a bit because of the strong performance of shares and their higher starting point – but it is still a healthy 3.5%. On this basis, over 20 years (using that same Rule of 72), equities are expected to double in value relative to cash.
The price you pay for that excess performance is higher volatility. But if you can ride out the ups and downs of the market in the short term, the long-term returns more than compensate you for the choppy ride along the way.
Volatility is not the same thing as risk.
5. Time changes the meaning of risk
If you need your money next year, then the volatility of equities might be a problem. If you need to sell in a hurry, a temporary drop in the market could be an issue.
But if you don’t need your money for another 20 years, inflation and weak returns are much greater dangers. The longer you are able to hold onto your shares, two important things are likely to happen to your returns:
The spread between the best and the worst annualised outcome narrows – volatility reduces
And, the average return is increasingly likely to be positive
This is not to say that shares are always the right answer. Different assets protect investors against different risks.
Cash protects against short-term loss
Bonds can help you meet future liabilities because they generate a predictable income
But shares provide the best protection against the risk that your capital fails to grow enough over a long period in real, inflation-adjusted terms
6. Market timing is hard
Switching out of shares into cash or bonds is easy. Knowing when to get back into the market is harder.
An investor looking at a cash yield of 4-5% can easily understand the impact that would have on their savings over a period of, say, the next 10 years. But that is not what they have signed up to.
Rather, they have bought into a short-term interest rate that gets repriced continuously. If inflation and interest rates fall, so too will the income from the cash.
And if this happens, the chances are that shares will rise in anticipation of the lower interest rates.
Missing out on those periods of sometimes rapidly rising equity prices can be costly.
7. The power of small differences
The difference between a total return of, say, 5% and 8% may not sound enormous. It is just 3% a year.
According to the UBS Global Returns analysis, US shares actually delivered a real return of 6.6% between 1900 and 2025, while bonds provided 1.6% and cash just 0.5%. Please remember past performance is not a reliable indicator of future returns.
Compounded over a period of 25 years, a 3% annual difference can be very significant.
If you grow £100,000 at 5% a year for 25 years it becomes £339,000. At 8% a year, it becomes £685,000.
In conclusion
These are the main reasons why investors with a long time-horizon should think very carefully before swapping long-term growth for short-term income.
Cash can make your money feel safer. Bonds can give your finances predictability. But if your investment horizon is measured in years or decades, it is equities that have historically been most likely to make you wealthier.
The higher income returns available on bonds and cash have not changed this. They have simply clarified the different roles each asset can play in your overall investment plan.
Bonds and cash are more attractive than they were. This does not mean that shares are less so.
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