Shares outperform property in the long run

The annual ASX-Russell Long Term Investing Report for 2013 has been released. The report analyses the performance of a number of asset classes over the past 20 years, from 1992 until 31 December 2012. At a time when the importance of asset allocation is touted by fund managers and brokers everywhere, the historical performance of asset classes can help investors understand how past performance has shaped the theory.

The long term investing report compares the performance of 12 different asset classes, covering shares, property, cash, fixed interest, and managed funds. Of interest to the majority of Australian investors are Australian shares, residential property, fixed interest, cash, and global shares. The following table compares the performance of the five asset types against inflation.

Asset Class Return Per Annum (since 1992) Valve of $100,000 invested in 1992
Australian Shares 9.8% $648,000
Residential Property 9.5% $614,000
Fixed Interest 6.3% $339,000
Global Shares (Unhedged) 5.3% $280,000
Cash 3.9% $215,000
Inflation 2.7% $170,000

As shown, Australian shares have outperformed all asset classes over the past 20 years, with an average annual return of 9.8% (including dividends but not franking credits). As the average dividend yield of the index is around 4%, investment in high yielding stocks such as Telstra (ASX: TLS) or any of the big four banks may improve the return. This compares favourably with residential property which recorded a return of 9.5%. These returns were achieved through a period which included the Asian financial crisis, the dot-com crash, the GFC, and the recent five-year stagnation of the property market.

The major flaw in the above numbers is the absence of after-tax returns. The following table shows the before and after tax returns, and tax rate of the asset classes.

Asset Class Annual pre-tax return (20 years) Annual post-tax return (20 years) Tax rate
Australian Shares 9.8% 7.9% 19%
Residential Property 9.5% 6.8% 28%
Fixed Interest 6.3% 3.2% 48%
Global Shares (Unhedged) 5.3% 3.8% 28%
Cash 3.9% 2% 48%

The asset classes most affected by tax are cash and fixed interest, which have no tax concessions. The growth assets, such as shares and properties, have a number of tax benefits and result in a much lower tax rate and thus post-tax return. These include delayed capital gains as tax is only realised upon sale, and franked dividends for shares.

Of note is the fact that most investors will not hold any asset, aside from potentially cash or property, for the full 20-year period. In the case when the asset is sold, the investor will likely be required to pay capital gains tax on any profit, which will lower the absolute returns. Additionally, volatility in the price is not considered which may help to assign asset allocation ratios depending on the investor’s preferred level of risk.

Foolish takeaway

While all Foolish investors will know that past performance is not a guarantee of future performance, the historical numbers over a reasonably long period of 20 years show that an investment in shares would have outperformed all other asset classes over that time. The data shows that a well-diversified portfolio consisting of many asset classes would have performed well over the 20 years, and this is not expected to change in the future.

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Motley Fool contributor Andrew Mudie does not own shares in any of the companies mentioned in this article.

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