Investing in UK shares has long been a proven method to build substantial long-term wealth. However, there’s no denying that these investment instruments come with significantly higher risks than bonds. Or at least, that’s how it works in theory.
Over the last year, it seems the complete opposite was the case. With interest rates rapidly rising, the bond market has reported its worst performance in all of recorded history, with some tumbling as much as 75%! That level of volatility is almost unheard of in the world of bonds and is akin to what stocks end up doing during uncertain times.
This downward momentum may have created buying opportunities for patient investors. But even with this potential, I’m still picking UK shares over these debt instruments to build wealth.
Why have bonds collapsed?
Just like the stock market, the bond market is driven by a wide range of factors. However, at the heart of it all are interest rates. And it’s no secret that these have been on the rise. This is great news for investors of newly issued bonds since the coupon rates are at today’s much higher levels.
However, for those with older bonds in their portfolio that were issued when interest rates were near zero, rising rates have created a calamity. With capital rapidly moving out of low-interest bonds and into high-interest ones, bond prices have been obliterated.
Having said that, this is only a major problem for short-term investors. Providing the underlying business doesn’t go bankrupt, older bonds will eventually mature and be repaid. As such, capitalising on heavily discounted bond prices can be a money-making move for patient individuals.
Yet, these returns could pale in comparison to the recovery momentum of UK shares.
Investing in equity over debt
The stock market has recovered from every financial disaster throughout history. And capitalising on the momentum generated during a recovery can lead to some exceptionally lucrative results.
Unlike a bond where the long-term return has a maximum limit, equities suffer no such restrictions. This does come paired with a typically higher risk profile and increased volatility. After all, unlike bondholders, shareholders are the last in line to recover anything during a bankruptcy.
But capitalising on temporary swings in valuation is a proven tactic for building wealth. And it’s how several recent buys for my portfolio have already generated high double-digit returns over the last couple of months.
As previously mentioned, this tactic can easily be applied to the bond market. However, investors may have to wait until maturity before underlying bond prices correct themselves. And for some, that could be closer to a decade away.
Meanwhile, early signs that the stock market recovery has begun have started to emerge, with impressive upward corrections from companies throughout this earnings season. While there’s no way of knowing for sure if the recovery has indeed started, a major amount of upward recovery momentum could be just around the corner for UK shares.
