What happened to the cult of Western equity?

Many investment professionals happily tell clients the right thing to do for the longer term is invest in equities.

Shares, they rightly point out, should provide you with rising income over time as dividends go up. As economies grow, so leading companies should grow with them.

Typically UK funds have around 60% invested in a mixture of UK, US and EU equities.

This worked well in the last century, with shares easily outperforming bonds and cash over most time periods, and always over the longer time periods.

If you work out how much people have made from shares over the last decade, the position looks rather different. Taking the 10 years to 30 June 2010, the overall total return from investing in the US S&P 500 index has been negative 14%.

Investing in the world index has cost savers 4%, while investors in the FTSE All Share have been rewarded with a miserly 17% for the whole 10 years.

This is not a one-off trick in the figures, stopping the clock at a very low point in the market. June 2010 comes after a strong rise in markets in 2009, recovering from the worst of the credit crunch. By mid-summer 2000, the problems of the tech bubble were already becoming clear.

This poor 10-year performance has been dogging us for some time.

Many clients who have experienced this from their fund managers are far from happy.

If you look across the world to Japan it looks even worse. Investment in the shares of the world’s second largest economy of the last decade has left an investor 27% worse off.

This is the second decade of poor performance. The Japanese Nikkei 225, which hit a high of around 40,000 at the peak of its asset bubble, struggles to get back to a quarter of that level.

I think we need to warn investors rather more of the dangers of disappointment from investment in the advanced large economies.

These economies are striving to get over a very bad crisis of over-indebtedness. They are all locked in an intense competitive battle with the emerging economies of Asia, Europe and Latin America.

World shares today only offer around 2% by way of income, which does not offer much protection if things go wrong.

Over the last decade a saver could make three times as much out of deposits than out of the UK share index. Maybe it is time to change the conventional wisdom that says advanced economy equities are always the natural long-term answer.

Ten years is a long time. Far from leading people to say shares now look very cheap, all we hear is talk of ‘double dip’, and ‘deflationary fears’. While those are likely to prove exaggerated, it is a warning that we are in an era of slow growth in the West. In later columns I will look at how else you can invest instead.

This is the first column in a series from John Redwood. A former Conservative cabinet minister, John is now chairman of the investment committee for passive investment house Evercore Pan-Asset Capital Management. Before moving into politics, John was an investment analyst, manager and director for Robert Fleming and NM Rothschild in the 1970s and 1980s.