Smarter Investing

As the Treasury looks to take a bigger slice of income, there has been a useful reminder of the importance of income to investment returns.

The Barclays Capital Equity Gilt Study is not just a book of numbers. It contains a variety of articles, some of which draw on the data.

The latest Study contains two pieces examining the importance of reinvestment in overall returns. For example, using the full data the Study has available the 2009 value of £100 invested at the end of 1899 reveals the following:

In real (ie inflation-adjusted) return terms, UK equity returns with gross income reinvested were 5.1% pa while without income reinvested the figure was 0.5% pa. For gilts the corresponding numbers are 1.2% and -4.1%.

The Study also includes data for the US, although this (based on an initial $100) only goes back to 1925:

The real annualised US equity returns with and without reinvested income were 6.6% and 2.3%, against 2.3% and -2.8% for US government bonds.

The Study does not include any statistics for property, but using IPD commercial property data going back to 1970 points to  an average annual real return of 4.1% with reinvested rental income and -2.0% based solely on capital values.

WEALTHFLOW COMMENT

These figures for various asset classes underline the importance of reinvested income to overall returns, particularly once inflation is taken into account. They also highlight the importance of wrappers, such as ISAs, investment bonds or pensions, in sheltering investment income from immediate tax (at up to 50% from 6 April this year).