On an annual basis JP Morgan produces a report on the performance comparison of various local asset classes. They asses the total performance across various time periods of equities, property unit trusts, home repayments, bonds and fixed deposits.
For most of the asset classes the data goes back to 1960 – hence a period of 49 years.
It’s a useful exercise to assess the history and variability of returns across various asset classes in an attempt to assess probabilities of returns going forward.
It’s useful to understand history in order to plan an appropriate asset mix.
As investors know, equities fell in 2008 for the first time since declining 11,2% in 2002. One needs to go back as far as 1970 to see a similar percentage decline in one calendar year.
However on a 5 year basis and for longer periods, equities have outperformed other asset classes, especially after tax.
On a pre tax basis bonds outperformed equities over the last 15 years. This comes from a period when equities were expensive and bond yields high and starting to fall with the decline in inflation.
The chart below indicates the performance over various time periods of the 3 main asset classes when compared to inflation.
Naturally assessing returns over longer periods smoothes out the shorter term volatility. An investment into equities is far more volatile than cash, but it is interesting to note the relatively high volatility of bonds.
Because of the high volatility equities should not be used as a short term investment medium.
This leads on to another interesting measure, which is the long term wealth effect. While 49 years is a lifetime, it is important to remember that an investor aged 60 has an investment horizon of 30 years.
JP Morgan calculates that a basket of consumer goods in 1960 costing R1000 would cost R55 370 at the end of 2008.
An investment in:
• Fixed deposit would have yielded R94 920
• Government bonds, R108 500
• Equities, R1 973 590.
While the compounded wealth in the bank or bonds would have hardly kept ahead of inflation, capital invested into equities produced a far superior result.
So the higher variability of returns of an investment into equities has in the past paid off with investors having received a far greater reward.
It also highlights the importance of the cumulative returns and not the 1 month, quarter or annual returns on long term wealth preservation against the biggest negative factor, i.e. inflation.