The idea of shifting from growth assets into an all-cash portfolio at this time may seem tempting to some investors.
Understandably, many investors are troubled by the deep European sovereign debt crisis, the lingering aftermath of the GFC and high sharemarket volatility.
The reality is that the annual returns from cash have been markedly higher than for Australian shares over the past 12-month and five-year periods.
The latest table of long-term asset class returns records that the total return from Australian shares (based on the S&P/ASX 200) was a negative 3.7 per cent for the 12 months to the end of October. And more significantly, local shares returned a negative 0.2 per cent a year over the five years.
These negative returns for shares compare with positive returns from cash for the same periods of 4.9 per cent and 5.4 per cent, respectively.
Yet looking more closely at the statistics reveals a different angle to the cash-versus-shares issue. Over longer periods, local shares produced annual returns that were markedly superior to cash:
- Over the 10 years to October, Australian shares returned 7.3 per cent a year against a 5.3 per cent cash return.
- Over 15 years, shares returned 8.4 per cent a year against a 5.3 per cent cash return.
- Over 20 years, shares returned 9.1 per cent a year against a 5.6 per cent cash return.
So when is cash not king? The answer is… Over a longer time period.
No asset class will outperform other asset classes every year. And sometimes the highest performer in any one year is the worst performer in the following year.
An investor who moves from shares to an all-cash portfolio during following a sharp sharemarket downturn often crystallises losses and could miss out on a possible rebound in share prices. And such investors lose the benefit of shares as a potential buffer against inflation.
To discuss where your assets should be and over what time period, please speak to one of our expert advisers using the contact page of our website, or give us a ring directly on (07) 32528810.