Investors in the UK have reason to be optimistic about the performance of both stocks and bonds in 2025. Despite a brief sell-off in April, UK stocks have shown resilience with a total return of 7.6% so far this year. This consistent performance has resulted in a three-year annualised return of 8%, making it another successful year for investors.

On the other hand, bond investors have also fared well, with the yield on 10-year gilts remaining attractive to some investors. The recent uptick in inflation, coupled with concerns about Labour’s fiscal policies and global fixed income market jitters, have made medium-duration UK sovereign debt an appealing option with a guaranteed annual return of 4.65%.

Comparing the performance of gilts to UK shares may present a challenge as the FTSE All-Share index is more globally diverse than purely domestic. However, it is important for investors to consider relative returns when making investment decisions. According to historical market data, the All-Share’s trailing price/earnings multiple suggests an average annualised total return of around 4.5% over the next five years, making it a competitive option compared to gilts.

While past performance can be a useful indicator of future returns, it is important to note that the correlation between PE multiples and five-year returns can be unpredictable. This unpredictability is reflected in the variance of rolling five-year stock returns, making it essential for investors to carefully evaluate their investment choices.

In the realm of strategic investing, the concept of “strategic mediocrity” offers a compelling approach to achieving consistent returns. By maintaining a balanced portfolio that includes high-yield bonds, investors can mitigate risk while still capturing equity-like returns. Funds like Royal London Sterling Extra Yield, Schroder Strategic Bond, and Invesco High Yield UK have demonstrated a track record of performance and consistency, making them attractive options for investors seeking a “good enough” approach to investing.

In conclusion, while the comparison between asset returns may have its limitations, adopting a strategic approach that embraces mediocrity can lead to long-term success for investors. By carefully selecting a diversified portfolio of assets and maintaining a balanced risk-reward profile, investors can navigate the complex financial landscape with confidence.