The last 5 years have seen strong returns in investment markets, thanks to double digit gains in shares and above average returns from property and fixed interest assets. Balanced superannuation funds saw median returns of 9.3% per annum, after fees and taxes, for the 5 years ending the 30th of September 2017. However the outlook for the investment markets is substantially more subdued over the next 5 years.
When we look at the expected return for an investment portfolio, the two things that we are trying to determine is the investment yield, as well as the potential for capital growth. The investment yield is simply the income that the investment is expected to pay, whether this be interest in the case of savings accounts or term deposits, or dividends in the case of shares. Unlike capital growth that fluctuates significantly year to year, the investment yield is relatively easy to predict, and it is also quite stable. It is therefore a crucial part of a portfolio’s overall rate of return.
Therein lies the difficulty at present. Interest rates have fallen substantially over the past 5 years, and even more significantly over the past 30 years. Most advanced economies now have official interest rates set at close to record lows, and in some cases interest rates are actually in the negative. This means that the investment yield from ‘defensive’ assets such as cash, term deposits and fixed interest investments, is going to be substantially lower moving forward. Shares have also experienced a strong rise over the past 5 years, which means that the dividend yield on shares is also lower as a result.
Medium Term Return Expectations
The following table shows the medium return expectations for the various asset classes moving forward. The return is broken down to show the expected investment yield, as well as the expected capital growth.
#Current dividend yield for shares, distribution/net rental yields for property and duration matched bond yield for bonds.^Including forward points *With franking credits added in
Source: AMP Capital
Combining the expected returns for each asset class implies a forecast return for a balanced portfolio of 6.5% per annum over the medium term. Whilst this is still a reasonable return in most investor’s eyes, it is obviously substantially lower than what we have become accustomed to over the past 5 years. If you note that the returns from cash investments are expected to be around 2.7% per annum, it also shows that investors need to consider having some type of growth assets in their portfolios, whether this be shares or property or ideally a combination of both.
It’s been 10 years since the start of the ‘Global Financial Crisis’ in November 2007. At that point in time the All Ordinaries Index for Australian shares reached a peak of just over 6,900 points. In an extraordinary 16 month period, the All Ordinaries Index fell to a low of 3,111 points in March 2009, a loss of well over 50%. Since that time the sharemarket has slowly recovered, with the inevitable ups and downs along the way. At the end of last month the All Ordinaries Index finally reached the 6,000 mark again, a level that it has not seen since early 2008. Happy 6,000!
Addison Partners Financial Planning can assist you to review your current investments and can assist you to determine the investments for you. Please contact Roy Massey on 4919 5500 or email@example.com for more information or to book in an initial free consultation.