If you’ve got money set aside and you’re looking to make it grow more effectively, it may be worthwhile looking into investing. What are some of your options?
Generally, you could generate returns in any of the four different groups of investments known as asset classes. These are:
Equities
Cash
Property
Fixed Income
The performance of these different assets can vary significantly over time, with the theory being that those with a greater level of risk should generally perform better over the long term, compared to those investments with a lower level of risk.
We look at the different asset classes and assess their long-term performance in Australia – keep in mind though that this is purely historical information. Past performance is not a reliable indicator of future performance.
Equities e.g. shares
Depending on the specific equities you choose, buying equities such as publicly-listed shares can provide high returns, but can also provide significant losses, hence it may be considered a risky asset class. Shares are vulnerable to sudden fluctuations in price that can result in big gains or losses in the value of your investment.
According to the ASX/Russell Investments report, Australian shares averaged 4% in gross returns per annum over ten years to December 2017. This makes it the second-lowest-returning Australian asset class out of the four. But don’t forget, this period of time encompassed the GFC.
Different shares can have very different results though! For example, according to Yahoo Finance, Costa Group Holdings was the worst performer on the ASX200 in 2019. Costa Group had a share price drop of 64.1%. Avita Medical, however, had a tremendous 696% gain in share price throughout the year.
Keep in mind that past performance is not a reliable indicator of future performance and great care is needed when making share selections. Many people pay an experienced investment adviser to do this for them.
Property
As reported in the ASX/Russell Investments 2018 Long-term Investing Report, Australian residential investment property averaged 8% in gross returns per annum over ten years to December 2017.
During the last two years, we have seen the Australian property market struggle, but it has begun rebounding. After slumping in 2018, both Sydney and Melbourne markets are turning around. The two cities both experienced gains in property value of 5% or more in the third quarter of 2019.
Investing in property can be very expensive and hard to get into depending on your financial situation and where you are looking to buy, but for many, it is a favoured asset class; property is part of the ‘great Australian dream’.
Additionally, property as an investment asset has risen in the last quarter-century. Data from the Aussie/CoreLogic 25 Years of Housing Trends’ report states that in May of 2015 ‘Investment’ mortgages were at an all-time high of 55% compared to just 20% in 1993.
Of course, the property market has its ups and downs, so it’s important to pick the right area at the right time.
Fixed income e.g. bonds
Fixed income assets, such as government and corporate bonds are often seen as providing a relatively stable and reliable return. When purchasing a government bond, you are essentially lending money to the government which they will pay you back with interest. This interest is paid to you in regular instalments throughout the length of the bond.
In the aforementioned ASX/Russell Investments report, Australian bonds averaged 6.2% in gross returns per annum over 10 years.
Although fixed income assets could be considered boring by some investors, having them as part of your investment portfolio can help to offset any losses you may have had from the share market – hence their classification as a ‘defensive’ asset.
Cash assets, such as savings accounts and term deposits, are the most liquid of all the asset classes. That is, they can be most readily converted to cash – hence the name of the asset class. Cash is the safest form your money can take but it typically generates the lowest returns. In Australia, cash averaged 3.6% in gross returns per annum over 10 years, according to the ASX report.
2020 saw the RBA cut the cash rate to an all-time low so interest rates may seem unappealing at this time, but it can be good to have some cash in a bank account because of the safety it provides and because you can access it right away when you need it. Bear in mind, though, that some providers of term deposits or savings accounts may charge a fee or reduce the interest they pay you if you decide to withdraw your money earlier than expected.