"Balanced Portfolio" versus "Salary Index" - 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 diversified "Balanced Portfolio" with rates of salary increases ("Salary Index" as an indicator of changes in living standards) over the 37 years from 30 June 1965, when suitable data for the various investment sectors first became available, to 30 June 2002. The salary increases used are obtained from published Average Weekly Ordinary Time Earnings (AWOTE) since 31/12/74, and Average Weekly Earnings (AWE) prior that date.

The Balanced Portfolio comprises:  

Growth

35% Australian Shares

Income

20% Fixed Interest

Assets

20% International Shares

Assets

  6% International Bonds

 

  7% Direct Property

 

  8% Cash

 

  4% Listed Property

 

 

Total

66%

 

34%

Let's examine what happened if $10,000 was invested at the start of the period, assuming that all investment income (ie dividends, net rent and interest) was reinvested back in each sector.  For comparison the Salary (AWOTE and AWE) Index starting from a base of $10,000, is also shown.

 The following chart plots the results for the first 20 years of the period.  During most of this period the investment performance was less than salary increases.

The following chart plots the results for the entire 37 year period.  During the latter part of this period the investment performance significantly exceeded salary increases.

 

The next table summarises the 37 year investment results: 

$10,000 invested for 37 years from 30/06/1965 to 30/06/2002

 

Balanced Portfolio

Salary Index

Accumulated to

$438,910

$179,879

Average Annual Compound Return

10.76%

8.12%

Average ‘gap’

2.64%**

                                                   Source: Austmod historical returns before tax and fees 

** This is the average annual investment return in excess of salary increases (ie 10.76% less  8.12% equals 2.64%).   On a compound basis the actual real (salary-based) average investment return is 2.44% pa (ie 1.1076/1.0812 less 1 equals 2.44%).   A long term positive real investment return is critical for the funding of adequate retirement benefits.

 

The year by year investment performance for each 30 June financial year has been:

Note that the annual returns for the Balanced Portfolio were negative 4 times in the 37 years (the return for the year ending 30 June 1973 was -0.3%).  More importantly, from a superannuation funding perspective, the annual returns for the Balanced Portfolio were less than Salary Increases 11 times in the 37 years.

To give some indication of the trend in investment returns and salary increases over the period, the next chart plots the 15 year moving average compound returns per annum:

   

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.