Geeks only. As promised earlier, a chart showing the hypothetical return on a 10Y gilt, versus the total return on a portfolio of FTSE stocks.
A dismal story. The green line is the value of the FTSE (Jan 2000 = 100) and as you can see it is slightly lower, currently 98.3 than when it started nearly 18 years ago.
Blue line is FTSE with reinvested dividends. Clearly the only reason your investment performed at all was the dividend, and interesting what an average yield of 3% can do.
Finally the red line is the hypothetical return on the gilt, and as you can see it returns slightly over the portfolio of stocks. The main reason is the higher return on gilts until the crisis, after which it gradually declines.
But enough grumbling from pensioners with defined contribution scheme, who probably read the Daily Express.
The main point is that the assumption of an equity risk premium, i.e. total return on equities exceeding the total risk free return, does not hold in the short term, where ‘short term’ means periods less than 20 years. There have been other periods, notably the 1930s, where the premium has vanished for a bit. Yet some of the Bank of England stress testing analysis, see e.g. what I commented on here, is based on the assumption of consistently high risk premium.
More to follow.