Article originally published by Dominic Beattie.
Generally, you could generate returns in any of the four different groups of investments known as asset classes. These are:
- Fixed Income
The performance of these different assets can vary significantly (sometimes inversely) over time, with the theory being that those with a greater level of risk should generally perform better over the long term, compared to those investments with a lower level of risk.
We look at the different asset classes and assess their long-term performance – keep in mind though that this is purely historical information. Past performance is no guarantee of future performance.
As reported in the ASX/Russell Investments 2018 Long-term Investing Report, Australian residential investment property averaged 8% in gross returns per annum over ten years to December 2017.
Investing in property is obviously very expensive and hard to get into, but for many, it is a favoured asset class; property is part of the ‘great Australian dream’. Home values have been falling in Australia’s two biggest property markets of Sydney and Melbourne, recently.
According to property analytics firm CoreLogic, Sydney house prices dropped 5.6% during the year to August 31, 2018 – a slump Sydney has not had since March, 2009.
Of course, the property market has its ups and downs, so it’s important to pick the right area at the right time.
Fixed income e.g. bonds
Fixed income assets, such as government and corporate bonds are often seen as providing a relatively stable and reliable return. When purchasing a government bond, you are essentially lending money to the government which they will pay you back with interest. This interest is paid to you in regular instalments throughout the length of the bond.
In the aforementioned ASX/Russell Investments report, Australian bonds averaged 6.2% in gross returns per annum over 10 years.
Although fixed income assets could be considered boring by some investors, having them as part of your investment portfolio can help to offset any losses you may have had from the share market – hence their classification as a ‘defensive’ asset.
Equities e.g. shares
Depending on the specific equities you choose, buying equities such as publicly-listed shares can provide high returns, but can also provide significant losses, hence it is considered a risky asset class. Shares are vulnerable to sudden fluctuations in price that can result in big gains and losses.
According to the ASX/Russell Investments report, Australian shares averaged 4% in gross returns per annum over ten years to December 2017. This makes it the second-lowest-returning Australian asset class out of the four. But don’t forget this period of time encompassed the GFC.
Different shares can have very different results though! For example, according to CommSec, in 2017 A2 Milk was the best performing share on the ASX 200 with a 261.3% gain in price while the worst performer on the ASX 200 was Retail Food Group with a 64.8% drop.
Keep in mind that past performance is not a reliable indicator of future performance and great care is needed when making share selections. Many people pay an experienced investment adviser to do this for them.
Cash e.g. savings accounts
Cash assets, such as savings accounts and term deposits, are the most liquid of all the asset classes. That is, they can be most readily converted to cash – hence the name. Cash is the safest form your money can take but it generates the lowest returns. In Australia, cash averaged 3.6% in gross returns per annum over 10 years, according to the ASX report. The record low interest rates at the moment may not be attractive, but it can be good to have some cash in a bank account because you can access it right away when you need it.
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