Over the long-term, shares usually provide a higher return than other assets like bonds, gold and cash. So why would investors include anything other than shares in an investment portfolio?
This article isn’t personal advice. Remember, investments rise and fall in value, so you could get back less than you invest. Investing for 5+ years increases your chances of positive returns compared to cash savings. Yields are variable. Past performance isn’t a guide to the future. If you’re not sure if an investment’s right for you, ask for financial advice.
The consensus long-term view
I asked Google Gemini and Chat GPT ‘what asset class will give me the best long-term returns?’ and the broad response from both was shares. However, Gemini added that ‘AI responses may include mistakes. For financial advice, consult a professional’.
So, I did just that. I asked several professional asset management companies about their expected future returns for different asset classes over the next 10 years.
Again, the response was clear – shares are likely to give the highest returns, followed by bonds, with cash trailing behind. But like AI, they all caveated that these are just predictions, markets go down as well as up, and actual investment outcomes could be very different.
And those warnings shouldn’t be ignored. No one knows what the future will look like. But there’s no hiding from a consistent theme here. Shares are expected to provide the highest returns over the long-term.
Which begs the question, why invest in anything else?
The past
The table below is based on annual returns at each month end for different assets over the last 25 years.
While the expectation is that shares (represented by the UK and global stock markets) would’ve delivered the best average performance, gold has provided larger returns.
That said, the performance of gold has been lumpy. It performed well during and after the global financial crisis in the mid-to late 2000’s. But the price of gold went effectively nowhere between July 2011 and May 2019, rising just 3.6%, a long way below the MSCI AC World return of 134.3%. More recently it’s risen dramatically in value, increasing by 82.9% over the last two years, ahead of the MSCI AC World return of 41.0%.
If the performance of gold over the last few years is a surprise, the performance of cash shouldn’t be. As the effective risk-free rate of return, it’s reasonable to expect all assets to outperform it over the long-term.
Ok, so why not just buy shares and gold then?
Other than the obvious – that past performance does not guarantee future returns – capacity for loss is the other important point.
The maximum drawdown metric is useful when considering the potential losses of an investment. Maximum drawdown is defined as the biggest fall in the value of an investment within a specific period. This table shows the maximum drawdown for different assets over the last 25 years.
And this is how many times the losses were bigger than 10% or 20% within any 12-month period over the last 12 years.
The difference in the number of times shares and gold have fallen by 10% or more within a 12-month period compared to bonds is stark. And while a 20% loss has been rare, it’s still happened regularly enough to warrant consideration.
This is why diversifying an investment portfolio away from just shares and gold is useful.
We encourage investors to make investments with a long-term view (at least five years) as well as holding cash for life’s emergencies (typically around 3 to 6 months’ worth of essential expenses if you’re working and 1 to 3 years if you’re retired). But sometimes, life happens. And sometimes when life happens, it means withdrawing assets from investment portfolios that were supposed to be left for many years to come.
If something unexpected were to happen in life during a global stock market shock, it’s possible investors would be drawing on assets that have lost more than 20%. But if at least some of the portfolio is invested in assets that have fallen less, then the investor has a choice of what assets to cash in and suffer lower losses as a result.
As Oscar Wilde wrote in his 1895 play, An Ideal Husband, “To expect the unexpected shows a thoroughly modern intellect”.
Three funds to diversify a portfolio away from just shares
Investing in these funds is not right for everyone. Investors should only invest if the fund's objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest and make sure any new investment forms part of a long-term diversified portfolio.
For more details on each fund’s objectives, its charges, and specific risks, see the links to their factsheets and key investor information.
BNY Mellon Multi-Asset Balanced
For investors who want to keep their portfolio focused on shares, a multi-asset fund mainly investing in shares, with a small amount invested in bonds and cash, could be a good option. We like the BNY Mellon Multi-Asset Balanced fund. It aims to achieve a balance between capital growth and income over the long term (at least five years).
The fund invests in larger companies from across the globe, typically based in developed markets, with the potential to grow over the long term. The fund also invests in bonds, usually those issued by developed market governments, and cash.
The fund can invest in high yield bonds, emerging markets and derivatives, all of which add risk. It also takes charges from capital, which increases the income paid but reduces the potential for capital growth.
JPMorgan Global Bond Opportunities
For investors wanting to add more diversity to a portfolio focused on growth, a portfolio seeking income, or one focused on company shares a bond fund might be suitable.
We think JPMorgan Global Bond Opportunities is a great option to provide broad bond market returns. It aims to achieve a balance between income and capital growth over the long term (at least five years). To do this, it invests in lots of different bonds issued by companies and governments all over the world. This gives investors a highly diversified bond investment within a single fund.
The fund can invest in high yield bonds, emerging markets, currencies and derivatives, all of which add risk.
Ninety One Diversified Income
The Ninety One Diversified Income fund aims to offer some shelter during stock market falls. Specifically, it looks to provide an income with potential for capital growth, while limiting the ups and downs to less than half of the UK stock market.
The fund mainly invests in bonds from around the world but also invests in some company shares too. Much of the fund invests in developed markets, but the managers do invest some money into emerging markets, which adds risk.
We consider this fund to be a step up in risk from cash, with potential for losses, but with the aim of limiting losses compared with other funds, while providing a consistent income over time.
The fund can invest in high yield bonds and derivatives, which adds risk. It also takes chares from capital, which increases the income paid but reduces the potential for capital growth.
Annual percentage growth
May 2021 - May 2022 | May 2022 - May 2023 | May 2023 - May 2024 | May 2024 - May 2025 | May 2025 - May 2026 | |
|---|---|---|---|---|---|
FTSE All Share | 8.27% | 0.44% | 15.44% | 9.35% | 21.64% |
IA Sterling Strategic Bond | -6.14% | -4.02% | 7.43% | 6.65% | 5.98% |
ICE BofA Global Broad Market | -7.94% | -3.22% | 1.83% | 5.36% | 3.74% |
LBMA Gold Price | 9.15% | 8.64% | 16.37% | 31.78% | 38.76% |
MSCI AC World | 5.61% | 3.08% | 20.84% | 7.78% | 30.85% |
SONIA | 0.27% | 2.85% | 5.25% | 4.87% | 3.98% |