We all want to earn decent returns on investments, and taking a long term view can be the key to maximising portfolio gains.
It always pays to bear in mind that returns are directly related to risk. Cash-based assets for example, are among the lowest risk investments – partly because of the government guarantee that applies to deposits of up to $250,000 per person per financial institution.
Reflecting this, you could earn a top rate of about 3.50% with an online savings account at present – though this assumes you meet the conditions needed to earn bonus interest.
It turns out that low return on cash isn’t out of the ordinary. The latest ASX/Russell Long Term Investing Report shows that over the 10 years to the end of 2014, cash delivered gross annual returns averaging 3.4%. Inflation was 2.7% per annum over the same 10-year period, meaning cash investments would have earned just 0.7% annually in real (after inflation) returns.
Over the 10 years to the end of 2014 the highest performing asset class was hedged international shares, which earned gross returns averaging 7.8% annually (compared to 5.4% for unhedged international shares). Hedging provides protection against currency variations and for an ordinary investor this sort of protection is easily achieved through investing in a hedged global share fund. It’s not something to try to arrange yourself.
When it comes to returns on assets that you can easily hold as a direct investor, over the past ten years it’s pretty much been a neck-and-neck contest between Australian shares and residential investment property.
Over the 10 years to the end of 2014, Australian shares delivered annual gross returns averaging 7.1% compared to 7.0% for a residential investment property (from across the nation). If we go back 20 years, residential property scoops the pool with gross returns averaging 9.8% annually compared to 9.5% for Australian shares. Clearly there’s not much in it. The nearest contender from here is global hedged shares, which returned an average of 8.6% annually.
Now that’s not to say one investment is better than the other. And past returns are no guide for the future. What this analysis does confirm is that it pays to look beyond cash if you want to earn healthy returns.
Choosing the investments that are right for you doesn’t just involve focusing on returns. There are other factors to consider like the frequency of income and how that income is impacted by tax, and of course the level of underlying risk. Your financial adviser can recommend a portfolio of investments suitable to your life stage and personal goals.