index-linked gilt fund - time to switch?

gozomark

"equities are riskier because they offer higher returns. (Presumably) your words."

thats not what I said at all. Equities are riskier due to their very nature. However, that doesn't mean they offer higher returns.

Could you please answer my question - why is it reasonable to expect equities to return more than cash in the long term ?

Myrmidon_J

Forgive me.
A statement that reduces to:

A [BECAUSE] B

That you respond to with (effectively): "the logic is the other way round".

Would surely translate to:

B [BECAUSE] A

No?

Perhaps I haven't answered your question directly, but nor have you answered mine.

I do understand the logical difference, but I also think that at a base level, the statement: "risk and return are correlated" is what matters here.

You yourself said:

You shouldn't invest in equities unless you expect the return to compensate you for the higher risk.

[My emphasis.]

1.) People do invest in equities,

2.) People expect the return to compensate for the higher risk,

3.) Unless every investor, everywhere, is a total numpty - or you know something that every other investor does not - then it is reasonable to expect that equities will offer higher returns than cash over the long-term.

There are many reasons for this. My own take is that the (generally) higher returns on equities are a function of the exploitation of 'labour' by organised capital. The more direct the process of exploitation, the higher the (excess) return. This has been observed for literally hundreds of years.

Please answer my question: Why take any risk at all if you have no expectation of reward?

gozomark

Why take any risk at all if you have no expectation of reward? - exactly my point, and brings us back to my question - why is it reasonable to expect higher returns ?

This is why I don't think its reasonable

Over the long term, corporate profits as a % of GDP are likely to be stable. That means, unless PE ratios rise over time, that stockmarket returns (incl dividends) will equal nominal GDP growth. Assuming inflation of 2% and real GDP growth of 2%, then nominal stockmarket returns will be 4% pa. Unless you believe savings rates won't be 2% pa above inflation long term, then how can equities beat cash ?

The cult of equites in the 1950's-1990's was driven by excess returns on equities over cash because PEs rose - Equities used to be very undervalued, largely due to a misunderstanding of how to value them - they were often valued merely by comparing dividend yield to base rate.

gozomark

Myrmidon_J wrote: »

Forgive me.
A statement that reduces to:

A [BECAUSE] B

That you respond to with (effectively): "the logic is the other way round".

Would surely translate to:

B [BECAUSE] A

No?

As a statement about logicality, that is correct - however, my statement wasn't in the form of A [BECAUSE] B

Californication

gozomark wrote: »

that should be potential, not expected return

It's expected return in the financial economics or probability theory sense:

http://en.wikipedia.org/wiki/Expectation_operator
http://en.wikipedia.org/wiki/Expected_return

see also

http://en.wikipedia.org/wiki/Equity_risk_premium

--C

fg22

Of course it is reasonable to expect higher returns from equities because they are riskier. If it is assumed that investors are risk averse then the market's expected return on equities will be higher than that of a risk free investment. If it was not then investors would sell equities and their price would drop until their expected return was sufficient to compensate for their additional risk.

Long term returns from equities are expected to be roughly equal to growth in GDP plus the equity yield. By ignoring income from dividends you are ignoring a large part of the expected return.

Myrmidon_J

gozomark wrote:

As a statement about logicality, that is correct - however, my statement wasn't in the form of A [BECAUSE] B

If your statement wasn't in this form, or a similar form, it is not a 'logical' statement. And, therefore, it cannot be reversed - you cannot turn it "the other way round".

(However, I think it was a 'logical' statement.)

This is why I don't think its reasonable...

I disagree with your analysis. (Or were you quoting someone else?) But even in the universe you describe, I think it extremely unlikely that cash deposits would attract a rate of interest in excess of 2.0% above inflation.

Historically, cash has not delivered 'real returns' for any significant time period.

In any case, there are still millions of people investing in equities - and expecting higher returns than cash.

So, to return to my earlier point: "Unless every investor, everywhere, is a total numpty - or you know something that every other investor does not - then it is reasonable to expect that equities will offer higher returns than cash over the long-term."

Valuation anomalies aside, in my opinion, if markets (in aggregate) failed to rise in the long-term, it would represent nothing less than the failure of capitalism. Whilst this is something that I, personally, would relish, I can't see it happening!

There are far too many markets "unexplored" and far too much labour "unexploited" to permit such an outcome. I think it is possible that markets may move sideways for a spell, and that 'developed' markets may underperform their 'emerging' counterparts, but I do not think for one minute that the recent history of the world is about to be shaken.

Californication wrote:

It's expected return in the financial economics or probability theory sense.

Of course it is. Thank you.

sabretoothtigger

purch wrote: »

Index Linked Gilts are currently overpriced.

Are they part of QE ? I dont follow the prices of bonds because I dont rate them especially as investments

The best bond yields were last winter as i understand it, over 10% return sounds great to me. Im not sure what they are now but maybe the PO index bonds would do

I think its a good time to switch so long as you dont expect good returns just risk reduction. I prefer the idea of investing in CRB commoditys
Own something real instead of a currency even if its index linked



9% yield on bank bonds ? high risk in theory http://finance.yahoo.com/q?s=pgf&.yficrumb=ULfEUh2Y4v.

Phyllis

Didn't mean to start an argument, but thanks for all your comments and advice. Think I'll stay with corporate bonds for a while and switch to IL Gilts some time next year. Is there a way to decide when these have become attractively priced?

CLAPTON

I know little of bonds or IL gilts but if the bond market is 'nearing' it's peak and has 'a little way to go' then that's just the time to get out... unless you truely are an expert that that time the top to perfection.