Equities Still An Investor’s Best Long Term Choice

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By Chris Shaw

It may have been a volatile ride at times but a long-term investment in shares has generated the best “real” returns over both the last 10 years and last 20 years according to the latest report by Russell Investment Group commissioned by the Australian Stock Exchange ((ASX)).

The report, released today, is the 11th annual report into asset class performance and shows Australian shares outperformed both listed property and residential property in delivering the best after-tax and after-cost returns, this outperformance coming at both the lowest and highest marginal tax rates and also at the superannuation tax rate.

One piquant detail is that the report does not take into account the share market correction in the first quarter of this year.

For the 20 years to December 31st last year Australian shares returned on average 12.7% per annum at the lowest marginal tax rate and 10.3% at the top marginal rate, while Australian listed property returned 11% and 9% respectively and residential investment property delivered average gains of 10.2% and 8.5%.

Australian shares also topped the list when borrowing was factored into the equation, as by allowing for a 50% gearing level and taking into account performance for the past 10 years shares for investors on the top marginal rate returned 13.9% after tax against residential property at 12%, while at the lowest marginal tax rate the figures showed a 16.2% after tax return for shares against 13.4% for residential property.

Gearing also boosts returns according to the report, as for the same 10-year period after tax returns on an ungeared share investment were just 10.6% at the top marginal rate and 13.2% at the lowest marginal rate, while non-geared residential property over the same period delivered returns of 8.8% and 10.6% respectively.

Russell Investment Group director of investment strategy Mr Andrew Lill points out the report supports the market adage of “it’s not timing the market but time in the market” that counts. Lill believes the results prove that assets with greater short-term volatility such as shares deliver higher returns in the long run.

The numbers themselves also support the importance of time in the market, as when looking at 10-year returns generated until December 31st last year, it is worth noting all asset classes had periods of booming prices and periods when returns were not as spectacular, but Australian shares, listed property and Australian residential property all delivered strong gains over the period even when inflation is taken into account.

What may surprise is the slightly superior performance by Australian listed property when compared to residential property as in after tax terms at all tax rates (highest and lowest marginal rates, superannuation rate) listed property has delivered slightly superior returns.

The report also shows the importance of investing via superannuation given the tax benefits it offers, Lill suggesting investors consider super as being of similar important as part of an individual’s overall investment strategy as that of an owner-occupied property investment.

As evidence of this the report shows the average return for the past 20 years at the superannuation tax rate from an Australian share investment was 12.9%, while residential property delivered a 10.4% average return and listed property averaged an 11.3% return.

For each asset class the report has attempted to take into consideration expenses related to the acquisition and disposal of assets as well as holding costs, as well as changes to tax and stamp duty rates during the periods under analysis.

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