Another five great charts on investing
Chart #1 Time in versus timing
Without a tried and tested asset allocation process, trying to time the market, ie selling in anticipation of falls and buying in anticipation of gains, is very difficult. A good way to demonstrate this is with a comparison of returns if an investor is fully invested in shares versus missing out on the best (or worst) days. The next chart shows that if you were fully invested in Australian shares from January 1995, you would have returned 11.3% per annum (including dividends but not allowing for franking credits, tax and fees).
Chart #2 Look less
If you look at the daily movements in the share market, they are down almost as much as they are up, with only just over 50% of days seeing positive gains. See the next chart for Australian and US shares. So day by day, it’s pretty much a coin toss as to whether you will get good news or bad news. But if you only look monthly and allow for dividends, the historical experience tells us you will only get bad news around a third of the time. Looking out further on a calendar year basis, data back to 1900 indicates the probability of bad news in the form of a loss slides to just 20% in Australian shares and 26% for US shares. And if you go all the way out to once a decade, since 1900 positive returns have been seen 100% of the time for Australian shares and 82% for US shares.
Chart #3 Risk and return
This chart is basic to investing. Each asset class has its own risk (in terms of volatility and risk of loss) and return characteristics. Put simply: the higher the risk of an asset, the higher the return you will likely achieve over the long term and vice versa. The next chart shows a stylised version of this. Starting with cash (and bank deposits), it’s well known that they are very low risk but so is their return potential. Government bonds usually offer higher returns but their value can move around a bit in the short term (although major developed countries have not defaulted on their bonds). Corporate debt has a higher return potential again but a higher risk of default – particularly for junk bonds. Corporate debt is basically a hybrid between equities & government bonds. Unlisted or directly held commercial property and infrastructure offer a higher return again but they come with higher risk and are less liquid and can be less able to be diversified (although this can be remedied by investing via a managed fund). Equities can offer another step up in return but this is because they come with higher risk as they are subject to share market volatility and individual companies can go bankrupt wiping out share holder capital. Beyond this, private equity entails more risk again and so tends to command an even higher return premium. Each step up involves more risk and this is compensated for with more return.
Chart #4 Diversification
Best and worst performing major asset class
|Year||Best Asset Class||Worst Asset Class|
|2001||Aust listed property||Global equities unhedged|
|2002||Unlisted infrastructure||Global equities unhedged|
|2003||Global listed property||Global equities unhedged|
|2004||Global listed property||Cash|
|2005||Aust equities Cash||Cash|
|2006||Global listed property||Aust bonds|
|2007||Aust equities||Global listed property|
|2008||Aust bonds||Aust listed property|
|2009||Aust equities||Unlisted property|
|2010||Global listed property||Global equities unhedged|
|2011||Unlisted infrastructure||Aust equities|
|2012||Aust listed property||Cash|
|2013||Global equities unhedged||Australian bonds|
|2014||Global listed property||Cash|
Chart #5 Residential property has a role
Chart #1 in the first edition in this Five Charts series highlighted the power of compound interest, with a comparison showing the value of $1 invested in various Australian asset classes back in 1900 and what it would be worth today. Unfortunately, I do not have monthly data for Australian residential property returns back that far but I do have them on an annual basis back to 1926 and this is shown in the next chart starting with a $100 investment. (Commercial property return series only really go back a few decades.)
Dr Shane Oliver
Head of Investment Strategy and Economics and Chief Economist
About the Author Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital is responsible for AMP Capital’s diversified investment funds. He also provides economic forecasts and analysis of key variables and issues affecting, or likely to affect, all asset markets.
Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided. © Copyright 2017 AMP Capital Investors Limited. All rights reserved.