The more I read from Shane Oliver, the more I become impressed with his balanced assessment of the current economic and investment conditions. Over the weekend I read an article of his published in the Australasian Investment Review, a freely available online publication - Super Returns: Don't Be Greedy.
In the article Mr Oliver provides an analysis of the medium term return potential in investment markets. He begins by commenting that recent returns from 2003 to 2007 were well above sustainable levels. This is an opinion that we also subscribe to. He goes on to look at indicative return expectations for the medium term using some simple models.
From these models he provides the following projected returns:
|
|
Dividend Yield |
Growth |
Return |
|
US Equities |
2.4 |
5.2 |
7.6 |
|
UK Equities |
4.6 |
4.2 |
8.8 |
|
European Equities |
4.3 |
4.0 |
8.3 |
|
Japanese Equities |
1.9 |
3.0 |
4.9 |
|
Asia ex Japan |
3.5 |
8.0 |
11.5 |
|
World Equities |
3.0 |
4.9 |
7.9 |
|
Australian Equities |
4.6 |
5.7 |
10.3 |
|
Unlisted Commercial Property |
6.3 |
2.5 |
8.8 |
|
Aust REITS |
7.6 |
2.5 |
10.1 |
|
Global REITS |
6.4 |
3.3 |
9.7 |
|
Aust Bonds |
5.7 |
0 |
5.7 |
|
Aust cash |
5.5 |
0 |
5.5 |
|
Diversified Growth Mix
30% defensive, 70% growth |
|
|
8.5 |
Oliver confesses that there are some drawbacks with the models particularly in terms of dividend yields but overall he is comfortable with the results.
Based on his data, investors with a reasonably balanced portfolio would be looking at 5.5% real returns (after the impact of inflation) over the medium term.
This figure is very consistent with the figure we use for projections for our clients regarding likely investment returns. (We also consider a draw down rate of 5% in real terms as sustainable in retirement.)
The key message for me from Shane Oliver's analysis is that we all need to be realistic about the returns we should expect from our investment portfolios. We would all love these returns to be higher, and maybe we will see a strong bounce back over the next few years. However we need to be prepared that throughout history growth asset investment markets have tended to provide returns of 5 to 6% above inflation. If you plan using these expectations and develop your portfolio so as to avoid the erosion of returns through high fees and heavy trading strategies you are much less likely to end up disappointed with your investment experience.
Take a look at our Building Portfolios page for more information on our approach to building investment portfolios.
Regards,
Scott Keefer
