So which asset should you go for as a long-term investment?
Numerous studies have been done about the rates of return that each of them have produced down the years. Generally speaking, assets that have demonstrated higher returns tend to be more volatile, especially when you look at short periods. And the asset that has generated the best returns over the long term is equities.
Shares Win
According to Australian boutique investment firm Perennial Investment Partners, over the 30 year period to 31 December 2009:
* Australian shares were the strongest performers, providing an annualised return of 12.7% p.a. (or a real return, after allowing for inflation, of 8.2% p.a.);
* International shares and property provided an annualised return of approximately 10.4% p.a. (or a real return of 5.9% p.a.), around 2.3% p.a. less than Australian shares;
* Fixed interest securities provided an annualised return of approximately 9.8% p.a. (or a real return of 5.3% p.a.), around 2.9% p.a. less than Australian shares; and
* Cash provided an annualised return of approximately 7.6% p.a. (or a real return of 3.1% p.a.), around 5.1% p.a. less than Australian shares.
The same firm put together a table showing the value of $10,000 invested in the respective asset classes for the 30 years to 31 December 2009, saying…
Whilst Australian shares outperformed international shares by a modest sounding 2.3% p.a., looked at on an annual return basis, this results in a large difference in actual investment values when viewed over the longer-term. When compounded every year, even relatively small increases in investment returns make substantial differences to long-term investment results.
Value of $10,000 invested for the 30 years to 31 December 2009
| Asset Class | Value Of Investment ($) | Difference to Australian Equities$ % | |
| Australian Shares | 364,734 | 0 | 0 |
| International Shares (Unhedged) | 195,302 | -169,432 | -46.5 |
| Property | 196,024 | -168,711 | -46.3 |
| Australian Fixed Interest | 164,854 | -199,880 | -54.8 |
| Cash | 90,677 | -274,057 | -75.1 |
Source: Long-term Investing: An Insight, An Annual Study by Perennial Investment Partners
As the old disclaimer goes, part returns are no guarantee of future returns. The past 30 years has been an excellent period for long-term share market investors, even if the period does include the crash of 1987, the Asian crisis of 1998, the dot com bust of the early 2000s, and the global financial crisis (GFC) of 2008-9, amongst other periodic wobbles.
Investing in shares over the short term is very risky, but the longer you invest for, the less risky and more profitable it should become.
Beware Those Nasty Charges
At this point we should also mention charges. All else being equal, the lower the charges you pay the higher you can expect your eventual return to be. As we saw in the table above, even small percentage differences can make a huge difference to the final amount.
Unfortunately, here in Australia we have a financial services industry that has a talent for both high charges and clever marketing to obscure that fact!
The industry also loves to put several layers of middlemen in between your money and its eventual investment destination. Each takes their cut and that leaves less for you. So make sure you read the small print, as all investment products have to lay out their charges in what is known as a Product Disclosure Statement (PDS) document.
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