Bumpy rides vs smooth journeys in long term investment

4 minutes  

Take outs

  • Long term investment performance helps design portfolios for the future
  • Residential property outperformed other asset classes over the long term
  • Your investment choices can mean a smooth journey or a bumpy ride

Every investor wants to know the secret to successful long-term outcomes. But there can be a lot of ways to get to your destination, depending on the type of journey you’re willing to take.

Scott Fletcher, Director of Client Investment Strategy at global investment management firm Russell Investments Asia-Pacific, joined us for the Netwealth webinar, Planning for your long-term financial objectives.

Scott shares key findings from the 20th edition of the annual Russell Investments ASX long-term investing report and the implications for Australian investors on choosing a bumpy ride or a smooth journey.

Why look in the rear view mirror?

The Russell Investments report looks at the performance of different investment types in the Australian market over 10 and 20 year periods, including residential property, Australian shares, fixed income, international shares and more.

Scott says the real value of long-term results over the last 10 and 20 years is in the journey across asset classes, rather than a change from one year to the next.

“The past has an awful lot of information on designing portfolios for the future. Whatever scale you’re investing on, you have to start with what outcomes we want for our portfolio,” he says.

“A long-term view means an informed choice on the right mix of asset classes to achieve that outcome; it’s a point in time snapshot of the historical relationship between asset classes and a head start on adjusting to current market conditions to achieve that outcome.”

10-year view

Over a ten year period, Australian residential property, hedged global shares and bonds led the way.

Scott says the outperformance of property may seem obvious given the Sydney and Melbourne markets in the last few years.

“But remember that the most recent 10 year period starts with the worst of the GFC. Property fell in the period, simply not as far as listed equities,” he says.

20-year view

Over 20 years, Australian residential property continued its outperformance of other asset classes.

“If we look back 20 years, the trend holds up. Residential property outperformed when the 2001 tech bust hit global equity markets. Over the long-term, property still falls, just not as much as equity markets. Which is why properties are part of a diversified investment portfolio,” says Scott.

However, unlike the 10 year period, Australian shares performance outranks global shares.

“In the 10 year period, global shares outperformed Australian shares in 7 of the 10 years. The 20-year view includes a strong run of local market outperformance after the US tech bust that hit equities hard.”


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The bumpy ride

The ‘bumpy ride’ approach is one way to manage market volatility. This approach is about trying to predict the next winner in asset classes, and being aware of the human factor is key.

“We need to stop ourselves from making silly decisions on investing, and there’s a couple of key behaviours to keep an eye on,” Scott says.

“One is over-confidence. Bull market heroes are a dime a dozen. Almost everybody can be a successful investor in a bull market phase. Over-confidence comes unstuck when volatility rises and leads to things like trading too often.”

Scott says the following trends and familiarity can also play into poor investment decisions.

“Following trends on what everyone else is doing often leads to buying high and selling low. Despite the very top of the market cycle being the point of maximum financial risk, we typically see high inflows into mutual funds around the peak of the market cycle,” Scott explains.

“And because humans tend to prefer what’s familiar, Australian investors tend to overweight Australian shares. If you don’t understand global equities or Brexit, you tend to defer to residential property and shares in a supermarket you visit every day.”

The figures show the cost of investment flip-flopping by going in and out of the market.

“Going to and fro can cost approximately 1.8 percent,” Scott says.

“It doesn't sound like much, but in the long term that’s making a big difference to whether you meet your financial goals.”

The smooth journey

A smoother approach to investments is focussed on staying invested in a diversified portfolio and understanding there’re many ways to get to the same financial destination.

“By starting with your current financial situation and connecting it to your financial goals for retirement or over a specific number of years, you and your adviser can pinpoint the capital you need now and the rate of return required to get you where you want to go,” Scott says.

The more diversified your portfolio, the less up and down swings your investment will experience: the smoother journey rather than a bumpy ride in a volatile share market. Multi-asset class portfolios where property and equities are put together with different weightings can mean a higher probability you’re going to reach your goal.

“A profile of 70 percent growth and 30 percent defensive can provide a tradeoff that works. You’re trading some of the stellar upside for far less of the awful downside,” Scott says.

“You might be able to get there on a bumpy ride, but less swings and roundabouts means a more comfortable journey.”

Find out more

Listen to the Netwealth webinar, Planning for your long-term financial objectives, for more on 10 and 20 year asset performance and how the journey can be just as important as the destination.

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The information in this article is general in nature. Any financial advice it contains is general advice only and has been prepared without taking into account the objectives, financial situation or needs of any particular person. The article content is not intended to be a substitute for professional advice, so before you act on it you should determine its appropriateness having regard to your particular objectives, financial situation and needs, and seek any professional advice you require. 
Any reference to a particular investment is not a recommendation to buy, sell or hold the investment. The relevant disclosure document should be obtained from Netwealth and considered before deciding whether to acquire, dispose of, or to continue to hold, an investment in any Netwealth product.