With stock market volatility, investors inevitably ask…“Should I have invested in cash instead?”
While we can never predict the future, we can look back at the returns of various types of investments over the last decade to answer this question. In this scenario we compare the performance of 4 asset classes if $10,000 was invested in June 2000 and the income reinvested until August 2011.
This exercise compares the performance of:
2. Australian Equities,
3. Fixed Interest Fund,
4. A combination of all the above in a balanced portfolio.
Firstly, let’s examine the performance of the cash investment. Cash rates between 2000 and 2011 ranged between 3% and 6% and bank term deposit rates went up to 8% briefly. The result: the cash portfolio would have reached $17,170 in value after the 11 years of investment.
Next, let’s look at how a Fixed Interest Fund performed. While there was little volatility over the 11 years, the fund would have reached $20,020 by the end of the investment period, beating the performance of the cash investment by 29%.
Now, compare these results to an average Australian share market managed fund invested in the same time period with dividends reinvested. In this example the Australian share market is represented by the Perpetual Australian Shares Fund which invests primarily in the top ASX300. This would have resulted in $28,432, outperforming the cash investments by 113%.
Lastly, a balanced portfolio (comprised of 5% cash, 25% fixed interest, 35% Australian shares, 25% international shares and 10% property), would have been worth $22,666 after the 11 year investment period, also outperforming cash by 55%.
The clear conclusion is that the best performing asset class over the 11 years was the Australian Equities and the least effective was cash. For investors comfortable with medium risk, Australian Equities investment would be the investment of choice. For investors with a low risk profile, even the fixed interest investment would yield a better return than cash. A good financial planner will help investors establish the most comfortable risk/return stance.
Market history over the last 11 years dispels the theory that cash has been the best place to invest.
There are two additional factors we need to consider if we are investing; timing the market and time in the market. For example if the $10,000 had been invested in the Australian share market at its height in October 2007, the portfolio would today be worth only $8,811. The longer the investment is held, the more likely that we’ll go through a complete investment cycle so that we have at least one boom.
The analysis reminds us to match investments to the risk profile of the investor. Work with your financial planner to create a balanced portfolio, using investment decisions based on research and experience rather than intuition.