Shares or Property? Russell Investments – ASX 2015 Long Term Investing update

Each year consultants Russell Investments and the ASX publish a report detailing returns for various asset classes, such as cash, bonds, international and Australian equities and residential property. The 2015 report has recently been published and details returns for the 10 and 20 years up to December 2014. Highlights of this year’s report, which differ a little from the 2014 report outlined in my August 2014 blog, include:

  • Pre-tax returns from Australian shares and residential investment property are broadly similar over longer time periods.
  • Over the 10 years to December 2014 pre-tax returns for Australian shares returned an average of 7.1% (down from 9.2% p.a. in the 10 years to December 2013) and residential investment property returned an average of 7.0% (up from 6.1% in the 10 years to December 2013).
  • The numbers over 20 years slightly favour residential property with a gain of 9.8% per annum versus 9.5% per annum for Australian shares.
  • Median Australian residential property prices have risen in 16 of the last 20 years.
  • International shares (hedged for currency risk) outperformed both Australian shares and residential property over the past 10 years with pre-tax returns of 7.8%. The results are slightly less favourable for most investors once tax is taken into account.
  • Hedged overseas shares outperformed unhedged overseas shares over the past 10 years (this is not surprising given the strengthening of the AUD over the last decade, though more recent falls in the AUD are likely to narrow the gap).
  • Dividend imputation and the tax deductibility of expenses related to residential investment property benefit these types of investments as compared with cash, bonds and global equities.

DIY Investing

The emergence of the Internet over the last 20 years combined with related technologies such as laptops and smart phones has made it much easier for investors to obtain information that they can use for many purposes, including making investments.

Increasingly there are references to do-it-yourself (DIY) investing, Robo advice and similar approaches that empower the individual to make their own financial investment decisions without the need for any professional advice. Without wishing to discourage individuals from educating and informing themselves about financial matters, it is important to distinguish between information and knowledge/skill.

Many investors simply follow whatever trend is occurring at the time rather than doing any detailed research and analysis. The clear danger with this basically ad hoc approach to investment is that it increases the risk of destroying rather than growing wealth.

Most people would accept that you can’t become a doctor or a builder based on some part-time research using Google so it is naive to think that spending a small amount of time “researching” potential investments will give you a strong probability of a good outcome.

All professional athletes have coaches so even if you have the time and interest to be actively involved in making your own investment decisions it is worth considering engaging professional help to improve your chances of consistently making money.

Market disruptions – do they matter?

It would be very difficult not to be aware that there have been increasing uncertainties in the global economy this year and this has impacted in various ways, such as the significant falls in various commodities, such as iron ore.

Of particular importance to Australia is the slowdown in the Chinese economy given that China is now by far our largest trading partner.

While Greece accounts for only 2% of the European economy, clearly the potential for them to exit the Euro Zone has been concerning financial markets, primarily because of the fear that other indebted countries, such as Spain and Portugal might also seek debt relief if this is given to Greece.

While all of these issues are of some concern, remember that bad news always gets more attention than positive news and successful investors are careful not to be unduly influenced by day-to-day events, many of which are soon forgotten and have no lasting impact.

As a current example of the focus on bad news, daily headlines focus on the recent significant falls in the Shanghai stock market, yet little attention was paid over the last year to the dramatic rise in this market. The reality is that even after recent falls, this stock market is still up significantly more than the US, Europe or Australia over the past year.

Perhaps the most important message is that most big global news stories, such as what is happening in China, Greece or wherever, are unlikely to change your financial goals or the likelihood that you will achieve them. It is better to focus on having clear personal goals and implementing actions to achieve them. Focusing your attention on and reacting to day to day events can often be a way to destroy wealth, particularly as the lasting impact of many events is hard to ascertain at the time.

An example of this is the announcement that Iran and a group of six nations led by the United States have agreed to a historic accord to significantly limit Tehran’s nuclear ability for more than a decade in return for lifting international oil and financial sanctions against Iran.

I am not saying that some global events are not very important – the global financial crisis of 2008 is an example of something that really did matter- but most news events are not very significant in the context of building your wealth.

Greece – a brief update and some further thoughts

After weeks of drama, with French President Francois Hollande playing the good cop and German Chancellor Angela Merkel the bad, Europe has once again come up with a compromise. The deal reached on Monday imposes on Greece an even tougher plan than the one rejected by its people nine days ago so you would expect it to be unpopular with most Greeks.

As for whether the Greek Parliament and the various European Governments will endorse the deal, “it is too soon to tell”. Nevertheless, the immediate reaction from an equity market perspective was positive as the perceived risk of Grexit (Greece exiting the Euro) has at least temporarily diminished.

My personal view is that this situation still has a long way to run as Greece will struggle to implement the reforms demanded by its wealthier northern neighbours and, as it will never be able to pay down its unmanageably large debt, significant debt forgiveness will be required at some point. Plenty more dramatic headlines seem to be a safe prediction but hopefully with limited global consequences.

This newsletter contains general advice. It does not take account of your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision. 

Share This