Editorial: Security in diversity

The average return from balanced superannuation funds last financial year was 10.4 per cent, a strong result in any economic circumstance. About 70 per cent of superannuants invest in balanced funds, spreading their portfolio across local and international shares, property, bonds and cash. So the bulk of investors should be happy with their fund’s performance in 2009-10.

But superannuation is a long-term investment and one-year returns mean little to most people. It’s long- term performance that matters most. Over a longer period – the past 10 years – the average annual gain from balanced superannuation funds was just 4.6 per cent. This isn’t so impressive.

If an individual had invested in government and high-grade corporate bonds over the same period, they would have earned a 6.4 per cent annual return. Even better was the gold price which, on average, has risen 11.7 per cent each year for the past decade.

The main reason for the outperformance of bonds and gold was an underperformance of equities, reflecting the collapse in share prices after the technology boom of 2000 and the more recent global financial crisis.

The figures, provided by research firm ChantWest, debunk the theory that putting money into shares provides a higher return in the longer term. Investors think in terms of risk-weighted returns: the greater the risk, the greater the potential reward. But the figures show this theory hasn’t held during the past 10 years.

They also highlight the adage that when investing, there’s no sure thing.

Smart investors have learned a few things over the past couple of years that should hold them in good stead for the future. The most important is that diversification is crucial to long-term performance. Over the very long term (20 years or more) shares have performed better than most other asset classes. But there are periods when they underperform and the best way to insure against this is to diversify into cash, bonds and other asset classes.

Successful investors need to revisit their portfolios continually and rebalance their assets. It’s very easy for an asset class to appreciate (or depreciate) and change in value, thereby changing the skew of assets within a portfolio. Many investors never get around to rebalancing, meaning they deviate from their investment strategy. Given that accurate asset allocation is tantamount to achieving a good result, rebalancing must be done regularly.

Expectations need to be reined in. There was a boom market in equities, notwithstanding the occasional blip, for more than 20 years, so investors expect high returns. But inflation plus 3 or 4 per cent for equities is a realistic, sustainable expectation. (In the very long term, a sharemarket can only appreciate by as much as the economy grows.) And this means an expectation of 7 per cent annual growth over the long term, rather than 10 per cent, is sustainable. If investors don’t lower their expectations they’ll go looking for higher returns and take more risks – a recipe for disaster.

BRW this week provides a guide to the main asset classes for the next 12 months. There is no guarantee than any asset class will outperform. Nor can investors be sure that a specific stock or bond will do better than another. But by following a few sensible rules about diversification, rebalancing and expectations, investors can expect long-term rewards.

Sean Aylmer

BRW

Comments (0)