Well if ever there was a TIME to revisit the same age old argument of Property versus Shares then since this time a year ago – this is a TIME to do that.

In respect of what effects Growth Assets (Property and Shares) we have had:

• Inflation somewhat out of control – worldwide.

• Residential property values generally dropping in light of rising loan interest rates as well as an out of the normal (well above long-term averages) capital growth spurt in the last few years.

• Shares (and hence superannuation funds/superannuation pension funds/ordinary taxed investments that have some exposure to these growth investments) experiencing some severe volatility especially shares in the Tech space.

Questions such as:

1. The typical 60/40 type portfolio (being 60% Growth Assets and 40% Defensive Assets) portfolio is DEAD as a strategy?

2. Will the technology companies share prices come back after huge growth in previous years then a substantial drop in values (some over a 60% drop) in 2022.

3. Property – new purchases – how long to wait before the down turn settles?

are regular questions being canvassed.

All good questions. WE ARE NOT IN THE PREDICTING BUSINESS.

What do I run to?   Firstly, just don’t run.

Well let us firstly go back over the pros and cons of property versus shares. 

RESIDENTIAL INVESTMENT PROPERTY – The Negatives and Positives

• Requires a large investment to start.
• Probably need to borrow to start.
• Can have difficult tenants.
• It’s yours, you can to do what you want to your property – paint the door pink or the roof purple for example.
• You cannot get little bits of capital out of the investment. It is all or nothing – you cannot just sell the laundry.
• Can get called out (as the landlord) in the middle of the night to fix for example the hot water system.
• You are invested in one street in Australia – don’t have access to the wealth of the world.
• Cannot do in superannuation or pensions unless setup a SMSF.
• Can get some taxation benefits of gearing.
• High entry and exit costs
• If handy can renovate and hopefully get more capital gain from your “own” work when selling.
• Ongoing expenses including maintenance/insurance/agent costs.
• When the asset is held for more than 12 months then Capital Gains taxed at a maximum tax rate of 23.50%. For most people considerably less, depending on circumstances.

SHARE BASED INVESTMENTS – The Negatives and Positives

• Can start with as little as $1,000.
• Can get exposure to the wealth of the world.
• Low entry costs.
• Low exit costs.
• Loss of control – must rely on management of various companies being competent/efficient/ethical etc.
• Very liquid – monies generally available within a few days.
• More volatile than investment property.
• Profits of companies (and hence share prices) subject to a lot of factors around the world – lack of control by yourself.
• Ongoing fees – minimal
• Can get access to various investment themes/regions – e.g. financials/tech companies/Asia/Gold/US shares etc.
• Partial withdrawals of any magnitude.
• Companies can go broke.
• Can do for superannuation funds/pension funds or just ordinary investments.
• When asset held for more than 12 months then capital gains taxed at a maximum tax rate of 23.50%. For most people considerably less depending on circumstances.

Moreover, how have they performed? Well for the 10 years ending 30 June 2022 for every $1,000 invested on 30 June 2012 to 30 June 2022 then the $1,000 would have grown to:

• Australian Shares – ASX200 Index – $2,444 (income and growth) being 9.35% compound rate of return per annum over the 10 years.

• Residential Investment Property Index (All Australia Residential Property) – $1,755 (Growth only) being 5.79% compound rate of return per annum over the 10 years. Add to this rental return on average of 5% per annum less general expenses of say 1% being gross rental return. So total return of approximately 9.79% per annum (5.79% plus 4%).

The rental return will of course depend on how the property is funded (geared – negative, neutral or positive).

Thus 9% to 10% per annum total return on average, from either Australian shares broad market or residential investment property across Australia which is consistent with long term returns for other various periods.

In all likelihood for a lot of us (especially the wealth creators) then having a range of various types of investments is a good strategy. The prospect of good capital growth is a key as is the importance of liquidity depending on your stage of life and perhaps the need to draw down on your investments.

Ultimately the decision will come down to personal preference, with the need to keep in mind the main points of diversity and liquidity in investments. 

At Plus1 we are available at any time to discuss issues of this nature with due regard to your investments or financial planning generally.

SUPERANNUATION – we automatically think of superannuation when it comes to discussing retirement. And rightly so as it is the preferred method of government strategy to address incomes in retirement other than the Centrelink – Age Pension system. Besides all that superannuation is very tax effective.

Of course our retirement assets (for living expense drawdowns) can come from a range of asset sources not just superannuation holdings but investment property, shares, managed investments, term deposits/sale of business/home downsizing etc.

However, for a lot of employed Australians their superannuation will be the majority of their retirement monies.

Some of the frequent questions when discussing saving for retirement include:

• How long will my superannuation and everything else I have as investment assets that I can draw on last me in my retirement?
• What does my planned retirement look like in so many years’ time?
• How much should I put into superannuation above what is government mandated or legislated?
• How often and how do I receive an income in retirement for my daily/weekly/yearly living expense needs and those special one off expenditure needs?
• What will I get from the government’s Age Pension system?

Firstly, for all employees it is very important to be aware (and engage in it) that your compulsory employer contributions actually are and what is planned for down the road.

All employers are required to contribute 10.50% of salary /wages of their employees to the superannuation system. This percentage is planned to increase to 12% over the next few years.

How Much is Enough at Retirement

For the purposes of illustration only, if a person’s circumstances were as follows:

• Salary was say $80,000 per annum
• The future compulsory employer contributions of 12% was paid into superannuation for 40 years from say age 25 to age 65
• CPI Inflation averaged 3% per annum (salary increases)
• Investment Return say a net 6.00% per annum

then their projected superannuation at the end of 40 years would be estimated to be approximately $1.9 million through the marvellous workings of regular contributions and compound interest. Bringing this back to present day value (excluding inflation) then the figure is approximately just over $600,000.

Assuming a couple for some partial Age Pension entitlement purposes from age 67 then this amount of investment capital, with initial living expenses of $65,000 pa (in today’s dollars) – indexed to inflation of 3% pa, could be expected to last to a couples late mid-eighties.

Obviously we are living longer and working on longevity to say age 92 the  amount of superannuation investment capital needed would be approximately $2.9 million (in future dollars but 40 years away) and $900,000 (in today’s dollars).

As a rough guide if individuals topped up their superannuation by just 3% of salary over the whole 40 years used in this example then through the power of compounding and hopefully regular CPI salary increases at least then these sort of goals can be achieved.

It is fairly universally accepted that 14% – 15% of salary or other going into superannuation over a full working life will be sufficient to provide a lifestyle of approximately 65% – 70% of your last salary earnings as living expenses in retirement. For those of us with less than a 40 year period remaining then you need to run some numbers depending on existing holdings and time frame remaining before you expect to stop working.

At Plus1 we are available at any time to discuss issues of this nature with due regard to your investments or financial planning generally.

At a time when almost all investment markets have been experiencing negative returns including mainstream Australian Shares/International Shares/Bonds/Residential Property (bar Cash Based Accounts) it is appropriate to consider diversity of investments and hopefully less investment risk.

Traditionally there are Defensive Assets and Growth Assets in our portfolios;

• Superannuation Fund investments
• Superannuation Allocated Pension investments
• Ordinary investments (taxed at our marginal tax rates)
• Investment Trusts
• Investment Bonds (taxed at 30%)

Investments can be classified as the following:

DEFENSIVE ASSETS

Cash – Transaction Accounts, Cash Management Accounts and other Internet Based Savings Accounts.

Fixed Interest

• Term Deposits
• Government Bonds
• Corporate Bonds
• Hybrid Securities
• Mortgage-Backed Fixed Term investments
• Funeral Bonds
• Annuities

GROWTH ASSETS

Shares

• Australian shares
• International shares
• Small or large companies – shares
• Geographical – regional/country exposure
• Technology companies
• Financial companies
• Mining and energy companies
• Retail companies etc.
• US dollar invested or Australian dollar

Property

• Residential investment property
• Commercial
• Retail
• Industrial
• Houses/businesses or units

And even more diversity for areas of the above by way of:

• Range of terms to maturity of fixed interest investments.
• Different residential investment properties in different locations
• Style of any active Fund Manager – growth or value orientated
• Index following or active management
• Less concentration

One of the better outcomes of having a wide range of investments is the reduction of specific risk, of having a heavily weighted portfolio in any one type of investment.

Conversely, one of the lesser outcomes could be a reduced likelihood of outperformance in one’s overall portfolio as no one particular investment has a significant exposure to influence your overall total return. This being the price of less volatility, or perhaps less deviation from an average total return.  

In practice, if you were physically able to have all the above in one’s portfolio, even if only a small percentage in each investment, then the majority of any risk would essentially not be due to lack of diversity. However, a big element of one sort of risk has been removed.

The majority of this wide range of investment types can be accessed either directly or indirectly by way of Managed Funds or Exchange Traded Funds. Moreover, the specific investments can be spread across a sophisticated Platform Service provider for ease of administration, record keeping, income and capital gains tax recording and all associated reporting or held by Custodians or Trustees.

This can be for:

• Superannuation Fund investments
• Superannuation Allocated Pension investments
• Ordinary investments (taxed at our marginal tax rates) 

Clearly, with the advent and rise of the power, and ease of the use of data within computers there are mechanisms available to address a desire for aiming close to having the ultimate diversified investment portfolio. 

At Plus1 we are available at any time to discuss issues of this nature with due regard to your investments or any financial planning matter.

You may have heard of Warren Buffett, often referred to as the greatest investor of all time. In financial circles, he has been called The Oracle of Omaha relating to his standing (from Omaha – Nebraska – US) in the investment world. This is essentially through his company Berkshire Hathaway listed on the US Stock Exchange. One of the most incredible stock stories.

It is interesting to compare this particular share/company over the last 20 years (and 10 years as well) with the broad US share market being the S & P 500 Total Return Index (a spread across America’s top 500 companies). This table illustrates how Buffett’s company has tracked compared to the S & P 500.

This confirms that it is hard to beat the broad market returns, especially consistently over long periods (10 years or more). Even the GREAT find it difficult to outperform at times.

The intention of this article is not to knock a champion, as for over 6 decades Warren Buffett has amassed a fortune for himself and his believers.

The reason for the relative “lesser than what we would expect” performance would be a number of answers, but no doubt that Berkshire Hathaway had lesser exposure to some of the internet growth stocks over the past 10 years. This may have contributed to some of the numbers not shooting the lights out, so to speak. Who is to argue with Warren Buffett?

The main take from this article is that in the long term, if you can get on average 9% to 10% per annum (income and growth) from a well-diversified share portfolio, that is a good result. Getting 18% or 20% per annum total returns regularly over the long term is just not there.

With so many Exchange Traded Funds (ETF’s) available that relate to exposure to broad markets around the World, then these type of “match the market” investments have a place in our portfolios whether Ordinary investments, Superannuation Fund investments or Account Based Pension investments.

At Plus1, we are available at any time to discuss issues of this nature, with due regard to your investments or financial planning generally.