"Australian Shares" versus "Balanced Portfolio" - an historical perspective and comparison

This article is one of a series of SuperMail articles by Colin Grenfell, who is a superannuation consultant and actuary and Associate Director of SuperEasy.

Each article compares the long term performance of two investment sectors, such as Australian Shares, International Shares, Listed Property or Fixed Interest, or financial indicators, such as the Consumer Price Index (CPI), Average Weekly Ordinary Time Earnings (AWOTE), 90 day Bank Bill Rates or 10 year Bond Rates.

This article compares the investment performance of a portfolio of Australian Shares with that of a diversified Balanced Portfolio over the 42 years from 31 March 1965, when suitable data for the various investment sectors first became available, to 31 March 2007.

The Balanced portfolio comprises:

 Growth       36% Australian Shares

 Assets         25% International Shares

 (70%)          7% Listed Property

                   2% Direct Property

 Income       16% Fixed Interest

 Assets        7% International Bonds

 (30%)          5% Cash

                   2% Inflation Linked Bonds



First, let's examine what happened if $5,000 was invested in each of these two portfolios at the start of the 42 year period, assuming that all investment income was reinvested back in each portfolio, as occurs with some managed investments.

The following chart plots the results for the 42 year period. To show the relative sizes of the accumulated results for each portfolio, a logarithmic scale has been used. The ratio of the "Share" results as a percentage of the "Balanced" results is also shown.



Note that for the 23 year period from 31 March 1981 to 31 March 2004, the Shares portfolio slightly underperformed the Balanced portfolio, but in the last three years, to 31 March 2007, the Shares portfolio significantly outperformed the Balanced portfolio.

The next table summarises the results:

$5,000 invested for  42 years

from 31/03/1965 to 31/03/2007:

  Accumulated to:

Australian

Shares

$961,590

Balanced

Portfolio

$357,840

Difference

 

$603,750

Average annual

compound return

 

 

1st  14 yrs

next 14 yrs

last 14 yrs

  42 yrs

8.77%

18.18%

13.27%

 13.34%

6.31%

15.95%

10.07%

  10.70%

2.46%

 2.23%

3.20%

 2.64%

Standard deviation*

 42 yrs

 19.15%

 11.42%

 7.73%

           Source: Austmod historical returns before tax and fees 

  **   The "standard deviation" indicates, for normally distributed investment returns, that approximately:  

(a)  one-sixth of annual returns are less than (average - standard deviation)

(b)  two-thirds in the range (average - standard deviation) to (average + standard deviation)

(c)  one-sixth of annual returns are more than (average + standard deviation).


The year by year investment returns for each year ending 31 March have been:

In 27 of the 42 years the return for the Australian Shares portfolio exceeded that for the Balanced portfolio. However the annual returns for the Australian Shares portfolio were negative 9 times in the 42 years compared with only 6 times for the Balanced portfolio.

To give an indication of the trends in investment returns (and inflation) over the period, the next chart plots the seven year moving average compound returns per annum. The seven year moving average compound rate of inflation per annum, based on changes in the CPI, is also shown.

Disclaimer:   This article is intended to be a factual analysis of past investment returns.  It is not intended, nor is it to be regarded, as investment/securities advice.  It does not take into account whether any particular investment or type of investment is suitable for your individual circumstances.  It is strongly recommended that you seek professional advice before making any investment choice or decision.