Every investor understands the basic trade-off when it comes to where to put your money: the more risk you take, the more potential reward you garner. The flip side of this golden rule is the less risk you take, the lower the returns you should expect from your investments.

Cautious investors are no doubt aware of this risk-reward trade-off, but they may be surprised by the scale of the returns they have given up in the last decade and how volatile some safe-haven assets have been. The table below illustrates how a basket of safe-haven investments has performed relative to a global stock market tracker fund.

Bond investors in particular may be disappointed they have had to endure such high levels of volatility to achieve meagre long-term returns, which have fallen behind inflation. A £10,000 investment in the average gilt fund ten years ago would be worth just £8,519 today in real terms.

In part this can be attributed to the huge directional change in monetary policy which routed the bond market in 2022. While there are no guarantees, gilt holders are likely to have a smoother ride going forward now the bond bubble has popped.

Cash has also been a wealth destroyer over the last decade, with the average Cash ISA turning £10,000 invested into £8,456 after accounting for inflation.

Clearly interest rates are now substantially higher than they have been for the last 10 years, although the longer-term risk of inflation still threatens cash savings particularly as several interest rate cuts are pencilled in for this year. Even over the last year, despite rising interest rates the average Cash ISA has returned 2.7% compared to 17% from a global index tracker.

MARKET UPS AND DOWNS

Clearly an investment in the global stock market has ups and downs, and won’t be returning 17% year in year out, but history also tells us cash is very unlikely to match the returns provided by equities over lengthier periods.

Figures from the Barclays Equity Gilt study going back to 1899 show that over a 10-year time frame UK shares have beaten cash over 90% of the time. Moreover, cash produced negative real returns in six of the 11 decades between 1912 and 2022.

Gold has been a bright spot among safe havens. An investment in a gold ETF (exchange-traded fund) would have more than doubled your money over 10 years as conditions over most of the last decade have been ideal for gold to shine: low interest rates, currency debasement and a series of large economic shocks.

However, this return has not been achieved without a few thrills and spills along the way. Over the last 10 years the volatility of gold has been no less than that of the global stock market, and in 2013 investors saw the value of their holdings plummet by almost a third.

Trading gold as a standalone investment is a risky game due to price volatility, so investors should seek to hold a maximum of 5% to 10% of their wealth in gold. Despite its volatility, gold can fulfil a useful role in a diversified portfolio as it tends to wax and wane at different times to other assets so it can lead to a smoother journey at a portfolio level.

A 60/40 strategy, which invests 60% in equities and the remainder in bonds and cash, has fared reasonably well for cautious investors over the last decade, delivering returns significantly ahead of inflation while also experiencing limited downside.

If there is a criticism it would be that returns have trailed so far behind the global stock market, turning £10,000 into £18,707 compared with £30,172 from a global passive equity fund. A multi-asset portfolio such as a 60/40 fund is probably a good compromise for cautious investors who want some exposure to the stock market together with some downside protection to help them sleep at night.

Absolute return funds are meant to dodge most of the big investment losses racked up during periods of market turmoil, and to be fair these funds have largely succeeded in that aim with the sector average falling by just 2.8% at most in any calendar year during the last decade.

On the other side of the ledger, returns have been poor and on average absolute return funds have delivered negative real returns over the last decade. Performance fees and a lack of exposure to the market have been headwinds for this type of fund.

While these performance figures are all historical and don’t tell us what returns are going to be like going forward they do shine a light on the gulf that can grow over time between asset classes, especially those at different ends of the risk spectrum.

Conservative investors tend to be cautious as result of temperament or time horizon, and shouldn’t deviate from the risk levels they are comfortable with. They may simply have to save more to reach their financial goals, as returns will probably be lower as a result of a cautious approach. Those with longer time horizons and a stomach for the volatility of stocks should be wary of how much they hold in safe havens. They can work well as ballast, but they can also weigh you down.

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