Something I’m often asked is “Which investments pay the highest returns?” It’s the sort of question that can only be answered by looking at past returns – which if not a guarantee, are at least a guide to the future. However property investors will be pleased to learn that based on average annual results over the last decade, residential property has topped the league table of returns.
The 2016 Russell Investments/ASX Long-term Investing Report shows that in the ten years to 31 December 2015, residential property notched up average annual gross returns (before tax and fees) of 8.0% – the best result of any mainstream investment.
Interestingly, the second highest return – an annual average of 7.3% – came from hedged global bonds (‘hedged’ means the bonds were not impacted by currency fluctuations).
Australian bonds and hedged global shares both delivered average annual gains of 6.2% over the 10-year period, while Australian shares returned a less impressive 5.5%. By comparison, cash investments dished up 10-year average annual returns of 3.1%.
Fans of bricks and mortar will undoubtedly be chuffed at the results. But having followed long term returns for many years I know that over time it’s a case of swings and roundabouts. Over some 10-year periods Australian shares top the table, at other times it has been global shares. This year it’s residential property. You can check out previous long term investing reports on the Australian Securities Exchange website.
The bottom line is that no single investment consistently earns the highest returns year after year. Choosing an investment because it topped the most recent table of returns can lead to disappointment. Asset markets have a habit of changing rapidly, and last year’s rooster can quickly become today’s feather duster.
In fact, as I see it, the overwhelming message from the latest Russell Investments/ASX report is the importance of holding a diverse portfolio. It’s a fair bet for instance, that global or Australian bonds aren’t the first investments that come to mind when you think of strong returns. Yet the ASX study shows they have performed well over the last decade.
The great thing about investing is that we don’t have to choose one investment over another. It’s possible to achieve a high level of diversification even if you don’t have a lot of upfront cash. The solution can lie with managed funds.
With hundreds of funds to select from, you could choose to invest specifically in an overseas bond fund, or a global share fund. Or you could have exposure to a broad cross-section of investments through a multi-sector fund.
It’s an option that takes the hassle out of selecting which particular investments you should hold. Better still, by diversifying through managed funds, it won’t really matter which asset class tops next year’s returns list because you’ll already have a bit of everything in your portfolio.