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Wednesday, 25 July 2018

The Beta boys are back in town

Focusing on quality...

The S&P/ASX 300 Accumulation Index returned a very healthy 13.24 per cent for the 2018 financial year. 

It's always interesting to watch fundies report to the market and read the explanations presented for why they've underperformed the simple benchmark of just owning the index. 

In fact, some of the high-profile 'alpha' funds have even gone backwards over recent years as the stock market index has kept powering higher. 

Of course, value-aligned funds may hold cash in anticipation of better opportunities in the future, so underperformance in any given financial year may partly represent risk management.

But try telling that to impatient investors.

Snark aside, building wealth isn't a pissing contest, and if you adopt a sensible long term approach then you should do just fine with a balanced portfolio. 

Over 20 years Australian shares have returned 8.8 per cent per annum, and global shares 7.4 per cent per annum, outperforming cash, fixed income, and REITS.

You can click the image below to expand - all returns are gross of tax and costs, and represent unlevered investments.

Source: Russell Investments

Residential investment property has returned 10.2 per cent per annum over the past 20 years, putting many levered investors absolutely light years ahead in this asset class.

Geared returns from the stock market, conversely, have been a disaster for many over the past decade.

Sadly many of our property investor clients of around 2011 and 2012 were formerly investors in the stock market with substantial margin loans and CFDs, and remain so scarred as to be lost to the beauty of growing dividend streams forever (click to expand).

Source: Russell Investments

The journey for residential property has been far less volatile too, in aggregate, with some small drawdowns in 2008 and 2011 of 3.7 per cent and 1.4 per cent respectively, as measured on a total return basis.

This compares with some monster drawdowns for the stock market, with both Aussie and global shares each plunging by well over 40 per cent in 2008.

Devil in the detail

These figures warrant caution, however.

While it's very easy to replicate an equities index return through owning an index fund designed for that purpose - often scoring better returns than the hotshot managed funds - you can't so easily buy the property market.

Instead you own individual assets within that market, so returns may vary wildly.

Furthermore, many property investors churn their assets too quickly and end up missing out on the benefits of compound growth, with the big gains largely taking place in the later years of an investment holding period. 

As the sage of Omaha, Warren Buffett once wisely, just kidding.

Trade price indices and detailed labour force figures are out tomorrow morning, catch ya then!