![]() To stay ahead of the inflation demon and maximise risk-adjusted returns, Aaron Minney, head of retirement income research at annuities and investment giant Challenger, says investors can embrace several strategies.Ĭhallenger offers annuities – primarily for retirees – linked to the consumer price index to adjust cash income in line with inflation. ![]() Elsewhere, sharemarket investments in Vanguard’s basket of listed property would have turned $10,000 into $83,326. ![]() A $10,000 investment in US shares in 1993 would be worth $176,155 today on an average return of 10 per cent per year.īy comparison, Australian bonds returned 5.5 per cent per year to turn $10,000 into $49,394. The 30-year period Vanguard studied includes multiple wars, financial crises, tsunamis, pandemics, nine Australian prime ministers, five US presidents and Australia’s population ballooning from 17,635,000 to 25,770,000.ĭespite the upheaval, the old investment adage that bull markets climb a wall of worry has proven true as Australian shares returned a compound 9.2 per cent over the 30-year period to turn $10,000 into $138,778. “Our base case is inflation will be higher and more volatile, so with that in mind you’ll probably get less difference in returns between equities and other assets, given it’s less of a TINA environment now than it was in the last decade.” Long-term diversification “Over the immediate term, say the next couple of years, sharemarkets in the US do look quite expensive, but over 30 years they should do well,” Mullins says. In other words, the expected direction of interest rates tends to control asset valuations, and financial markets allocate capital based on estimated returns over the current cost of capital as a proxy for risk-free rates. There can be periods of underperformance, where valuations make a big difference.”Īlthough it’s not always possible to time the market, Mullins says professional investors such as Schroders aim to adjust asset allocation according to their view on the macroeconomic outlook. “The problem is most investors don’t have a 30-year time horizon, so valuations are important when they buy. “Taking an equity risk premium and taking on volatility actually gives you higher returns over the long run,” says Sebastian Mullins, head of multi-assets at Schroders Australia. Watch out for valuations, says Schroders’ Sebastian Mullins. Other market experts say that although it’s agreed that shares outperform bonds and cash over long-term horizons, that doesn’t mean investors should blindly allocate capital to shares, as returns are always a function of the price paid. It provides similar total returns over long periods of time, the rental income or yield is a bit less than the dividend yield on shares currently, but historically, I suspect they’ll keep up with each other.” “Property is not as volatile as shares, but it’s illiquid. “Charts going back to 1926 show shares and an property are about the same,” says Shane Oliver, chief economist at AMP. The consequent challenge to investor returns means market professionals favour growth assets such as shares – that are more volatile and carry higher risk than cash – to allow investors to ride out the worst of the damaging impact of rising living costs. It has since eased to 6 per cent in the June quarter, and the Reserve Bank of Australia forecasts that it will slow to 4.5 per cent by December this year and 3.2 per cent by the end of next year. ![]() However, Australian inflation peaked at 7.8 per cent in the December 2022 quarter (more than triple its 30-year average) at its highest level since 1990, as food prices surged 9 per cent, rent and housing 10.7 per cent and electricity 8.6 per cent. “Inflation over time erodes the purchasing power of money and, from that standpoint, adds to the likelihood of eroding returns on cash and term deposits,” says Balaji Gopal, Vanguard’s head of financial adviser services.Īccording to Vanguard, cash has returned an average of 4.2 per cent per year since 1993, from $10,000 to $34,737, to stay ahead of inflation. The study by the Australian outpost of the $11 trillion US passive investment giant shows that Australian inflation averaged 2.7 per cent a year since 1993, meaning investors would have needed to turn $10,000 then into more than $21,979 today to increase their real wealth. Still, investors have multiple options to beat inflation’s threat to their net worth, and asset manager Vanguard’s latest annual investment survey shows the asset classes that might perform best as the cost of goods and services soars. The return of inflation is the biggest challenge facing investors in a generation as its destructive effect erodes the income earned from a slew of asset classes, including cash, bonds, equities and investment property. ![]()
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