Everyone’s heard it: time in the market beats timing the market. It means a long-term approach will deliver better results than chasing investment returns.
So what assets are performing best over time? For the 20 years to December 2017, residential property returned 10.7 per cent, shares returned 8.7 per cent and bonds returned 6.3 per cent, according to the 2018 Russell Investments/ASX Long Term Investing Report.
However, performance varies depending on market conditions. Investors should expect lower returns over the coming years, says Haywood Financial Management and Partners financial adviser Scott Haywood.
‘We’re going to see long-term interest rates remain low for a long time, particularly in Australia, due to weak inflation, low jobs growth and low wages growth,’ Haywood says.
Globally, trade tensions between the US and its partners, political instability in Europe including Brexit, and a weaker Chinese economy will hamper market performance, says GSFM investment strategist Stephen Miller.
‘In an environment that is becoming arguably more risky, the overarching requirement is to have a well-diversified portfolio,’ Miller says.
How to diversify will depend on your priorities. Each asset class has its pros and cons. Here, we examine four traditionally long-term top performers.
‘There’s a place for term deposits in a portfolio. They provide certain returns and they’re still reasonably attractive,’ Miller says.
One-year term deposits paid an average of 2.15 per cent interest in March 2019, figures collected by the Reserve Bank of Australia (RBA) show.
That’s low by historical standards, but Miller says with inflation at 1.3 per cent at the RBA’s March reading, and government bond yields low, term deposit rates compare favourably.
The drawback? Cash is locked away and break costs may apply if you need to access the investment before the term ends.
Residential property has performed well for Australian investors. House prices have increased by an annualised 6.8 per cent over the past 25 years, according to the Aussie/CoreLogic 25 Years of Housing Trends report.
‘If the time horizon is sufficiently long, you’re likely to benefit from rising property prices, particularly in Australia where we have high rates of immigration that are likely to continue,’ says Miller.
Property returns are more stable than shares, partly because transactions take longer to execute. But prices can fall and so can market rents. Nationally, property prices dropped 7.4 per cent to March 2019 from their October 2017 peak, CoreLogic’s monthly property update shows. Meanwhile, rents in Sydney have fallen to 2016 levels, the Domain Rental Report for the first quarter of 2019 found.
Another risk is that tenants might vacate the property or not pay their rent, leaving the investor without an income. Some property types, such as those offered by Defence Housing Australia, can reduce these risks. DHA properties come with a rent guarantee, so investors receive income even if the property is vacant. A rent floor means the investor will never receive less than the starting rent, even if market rents fall below that point.
Government bonds are a good diversifier to riskier assets such as equities, says Haywood. ‘Bonds give you certainty of returns, but being in fixed interest in this environment is unattractive because the return is so low,’ he says.
The 10-year Commonwealth Government Bond yield hit a record low of 1.725 per cent in March, according to Pimco’s April market update.
The low return reduces, but does not eliminate, government bonds’ effectiveness as a diversifier to other investments, says Miller.
Corporate bonds and high-yield bonds offer higher returns but provide fewer diversification benefits, he says. ‘If equity markets are in a downdraft, corporate bonds or high-yield bonds don’t do that well either because they are corporate risk rather than government risk.’
Shares can be bought and sold quickly, and are expected to produce strong long-term returns.
Over the 30 years to June 2018, Australian shares delivered annualised returns of 9.1 per cent, according to the Vanguard 2018 Index Chart.
But it was far from a steady trajectory: the Vanguard chart shows that from late 2007 to early 2009, the index dropped almost 50 per cent.
There are no guarantees with any investment and no safe shortcuts to wealth. People who want to increase their portfolios need to do so over time using investments that align with their personal preferences.
Attention: Investment is subject to DHA’s lease terms and conditions of sale. Investors retain some responsibilities and risks, i.e. rent, restoration and market fluctuations. Prospective investors should seek independent advice. Rental floor applies to DHA properties leased under DHA’s Lease Edition 6C, which will not cover all DHA properties.
See dha.gov.au/lookforward for relevant information.
Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.