REVIEWING the performance of different investments over the past decade shows that equities in most centres have under-performed government bonds and cash.

Since equities are generally riskier, the unhappy conclusion is that investors have not been adequately rewarded.

Equity markets have approximately halved twice in the past decade. In between, they rallied close to their earlier highs but this was scant comfort when the recovery was undermined by the financial earthquake in 2008.

The total return of 18% on UK equities paled beside a return of 80% on 10-year gilts.

Such periods are relatively unusual, since equities over the past 75 years have delivered real returns, some 25 times greater than those on government bonds.

However, short-term under-performance is discouraging, especially for those whose investment horizon cannot wait for the 75-year “victory”.

Is it still right to back equities longer term? Reviewing the changed valuations in gilts and equities over the past 10 years offers some reassurance.

Gilts have moved from a 5.1% starting yield to one of 4% now.

Investors have enjoyed the annual income and seen a capital gain. Over the same period, equities have moved from trading on 25 times earnings to 12 times, while the yield has risen from 2.5% to 3.4%. So, gilts have become more expensive and equities have become cheaper than a decade ago.

Momentum investors would see this as a cue to stay with gilts for the next decade, since they have “proved their worth”.

The aftermath of two equity bubbles should deter this momentum approach.

The Japanese Nikkei equity index peaked at nearly 39,000 in 1989. Twenty years later, it is 74% lower at 10,100. In 1989, many were advocating investing over 30% of global equity portfolios in Japan (its weighting in world indices). Now, the weighting is under 10%.

More recently, the US Nasdaq index of technology stocks peaked in March, 2000, at which time the world was in the throes of the dot.com mania. Since then, it has fallen over 60%.

The lesson from this is that market moves that are not fundamentally supported are not worth following, though the timing of commonsense returning is hard to predict.

Although today’s picture is perhaps less dramatic for gilts, it is hard to imagine yields falling, given that investors will want some after-tax return on top of the Bank of England’s 2% inflation target.

If current policies lead to even modestly higher inflation, a rise in yields would be likely, leading to investors earning lower total returns.

On the equity side, the PE multiple might not rise but is in line with long-term averages, so the linkage of equity returns to economic growth should flow through to returns, leading to capital growth in addition to dividend income.

For medium-term investors, it is hard to see gilt investors repeating their home run of the past decade and the trend could reverse.