Normally we don’t like to use sporting analogies to discuss investment performance. The reason is simple: investing is not a competition in which one person wins and another person loses. It is much more egalitarian than that.
Investing is more like personal fitness: the aim is to become more wealthy, not the most wealthy.
But we can’t resist commenting about the ‘neck and neck’ nature of the performance of the share and property markets over the long term in Australia. The long-term performance of these asset classes is highlighted each June when the ASX/Russell Long Term Investing Report is released. You can read this year’s report here.
When the report arrives each year, we always turn first to the long term comparison between these two major asset classes. The report compares the ten and twenty year returns. (This is another reason we like the report – it stresses how holding investments for the long term is the best way to minimise risk). The ‘winner’ for the ten and twenty year periods to December 2015 was property, as shown in these extracts (the return includes rent or dividends and capital growth):
As the extracts show, residential investment property outperformed shares over both the periods, although the relative gap between them was lower in the longer period.
Remember, an investment returning 5.5% per year for ten years compounds to a total return of 70% for that period. If the initial investment was $100,000 in 2005, at the end of 2015 it was worth $170,000. An investment returning 8% per annum compounding over ten years provides a total return of 116% for the period. $100,000 becomes $216,000.
For the longer period, the investment returning 8.7% for twenty years achieves a total return of 430% over that period ($100,000 becomes $530,000), with the investment compounding at 10.5% for the 20 year period achieving total growth of 636% for the period ($100,000 grows to $736,000).
Remember, too, that these are averages. As we all know, the property returns in markets like Perth have been lower than the national average. And within the definition of ‘residential investment property’ are some notoriously poor performing types of property, such as high rise apartments.
Judicious selection of residential property achieved even greater returns than these averages over the period.
Please don’t read the above as a reason to sell your shares and buy property. The outperformance of property over shares is not something that we see every year. Sometimes the share market ‘wins.’ Consider the performances reported by ASX/Russell just three years ago, in 2013:
And
The real point is that shares and property achieve similar returns over the long term, and that the long term performance, which smoothes out the ‘bumps’ of individual bad years, is typically good. It does not matter so much whether you choose to invest in shares or property for the long term – as long as you invest in at least one of them for the long term.
It is a bit like whether you go for a run or a ride on your bike. Both will make you fitter. The important thing is that you do something.
There is also a basic logic as to why the two investment classes perform so similarly. When house prices rise, people feel more confident and they spend more. This drives economic activity, which lifts business profits and causes share market returns to also rise. This increase in business wealth is then used by its recipients to purchase more housing, and on it goes.
What’s more, Australia is in the very fortunate position of being a net recipient of international migration (that is, more people come to live her than leave to live somewhere else). This increases demand for housing, which gives a strong foundation to the whole cycle.
If you would like to discuss the ASX/Russell Report and how you can use it’s insights to influence your own investing, please don’t hesitate to call us.
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