Managing Funds: Figures show longer term equities best investment

It has been mentioned in these columns several times over the past few years that investors should adopt a long-term view in investing.

Daily fluctuations in the markets appear minor when viewing the big picture over several years.

Just recently I received a large wall chart from Grosvenor Financial Services Ltd.

Grosvenor is a Wellington-based fund manger which deals with financial advisers and offers a comprehensive range of managed products and KiwiSaver.

It also has a very good Bondwatch programme which ranks investment securities from banks, building societies and finance companies, according to their calculated risk profile.

The chart from Grosvenor covers the 40-year period from December 31, 1970, to December 31, 2011.

It shows the results of investing $10,000 in December 1970 annualised over the 40-year period.

It depicts asset classes of Australia, New Zealand and world equities, cash, residential property, World bonds and NZ bonds.

The period covers many world crises such as the oil crises in 1973 and 1978, the 1987 share market crash, the Gulf War of 1990, the bond market crash of 1994, Asian crisis of 1997, the technology bubble burst of 2000, the 9/11 terrorist attack, Iraq war and the global financial crisis.

The best performing asset class for the period, through all of these crises, was Australian equities, where $10,000 grew to $878,900 at an annual average of 11.5%.

The second best performer was NZ equities at $787,128 (11.2%). World equities were third at $694,786 (10.5%).

These figures are arrived at using the various market indexes. They are pre-tax returns of both growth and income.

Cash, using Reserve Bank figures for call rates, was the fourth best performing asset turning $10,000 into $399,240 (9.4%).

Residential property using Valuation NZ's capital valuation index and the Real Estate Institute median price comparisons returned $367,352 for $10,000 invested.

Residential property, taking into account growth only, averaged 9.2% per annum.

World bonds returned $348,292 (9%) and NZ bonds $272,306 (8.4%).

Inflation during the 40-year period averaged 6.9% each year with big quarterly peaks in 1972 and 1986 as high as (annualised) 30%.

There were also periods of quarterly deflation in 1991, 1998 and 2006.

The comment has been made before that it is "time in the market, not market timing that is important".

These figures show that over the longer term equities outperform all other asset classes.

Chopping and changing does not necessarily enhance your investments as long as you have a mix that matches your risk profile.

The greater the risk taken the greater the return if your investment mix has a high proportion of equities compared to fixed interest and property assets.

This long-term chart also shows that with regard to managed funds such as KiwiSaver, where funds are locked in until retiring age, fluctuations matter little over the longer term.

Peter Smith is an authorised financial adviser and a certified financial planner and is the principal of Kepler Group Otago Ltd, Dunedin. Email: pete@keplergroup.co.nz . A disclosure statement is available on request and free of charge.

 

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