Issue: 18
Sent: 14-11-2005 00:16:27
In this issue:
Return to full article list
HomeFree weekly newsletterSelf Managed Super Fund ArticlesCustomer surveysSelf Managed Super Fund Book storeContact usATC in the pressLogin
And you thought that was safe? - Lester Wills
Cash and fixed interest type investments are regarded by many as being relatively safe investments, conservative and low risk. For some, such attitudes are based upon the premise that an investor cannot lose money in such instruments. After all, cash and fixed interest investments do not suffer the vagaries of the stock market with its wild fluctuations.
Sadly, anyone with such an attitude will be in for a rude awakening at some stage. Whilst it is true that returns from short-term cash investments such as Treasury Bills may produce a positive return, once the effects of inflation have been taken into account, the real return may be minimal, or even negative.
Too many investors fail to make the distinction between nominal and real rates of return and consequently do not realise that their investment style, far from being conservative, may in fact be high risk.
Put simply, by using investments that produce a relatively low rate of return, the investors suffer the risk of having insufficient funds at the end of the investment period to meet their needs.
Investing in Bonds or Bills does not mean that the investor is immune from volatility, or that they may not make a loss.
Extensive research has been conducted into sixteen of the worlds Bond markets that represented more than 95% of the global markets on the 1st January 2000 with a combined value of almost US$30 trillion.
Unlike some research that is selective in both the markets it considers and the time frame it uses, this research examined returns for the 101 years between 1900 and 2000 and consequently encompasses all of the market upheavals of the 20th century.
Real annualised rates of return on Bonds ranged from 2.8% per annum in Switzerland to minus 2.2% per annum in Italy with the average across all these markets at 1.2%.
Australia was just below the global average with a return 1.1% per annum for the 101-year period between 1900 and 2000.
The range of returns from Bills was even greater with Denmark producing the highest annualised real rate of return at 2.8% per annum whilst Italy produced minus 4.1% per annum.
Australia's rate of return from Bills was positive, just. The return that an investor would have gained from investing in short term interest rate instruments such as Treasury Bills in Australia was 0.4%, for the 101 years between 1900 and 2000.
The return earned on Bonds was usually higher than that earned on Bills, with Denmark as the exception. It was the only country that produced a higher positive return from Bills over the period than from Bonds.
Equities outperformed both Bonds and Bills in each and every market during the 101 years in question.
The excess return earned in Equities over Bonds ranged from 2.1% to over 6% per annum. The excess return earned in Equities over Bills ranged from less than 2% to in excess of 7% per annum.
Australia produced the highest excess rate of return in both cases.
Consequently, the evidence clearly demonstrates that investing in supposed safe haven investments such as Bonds or Treasury Bills may not produce the safe return expected. The real rates of return are not just lower than that earned in equities they can even be negative.
Share this article
This email is general in nature only and does not constitute or convey specific or professional advice. Legislation changes may occur quickly. Formal advice should be sought before acting in any of the areas discussed. Be aware that the information in these articles may become innaccurate with time. Responsibility is disclaimed for any inaccuracies, errors or omissions. Particular investments are neither invited nor recommended and hence this publication is not "financial product advice" as defined in Section 766B of the above legislation. All expressions of opinion by contributors are published on the basis that they are not to be regarded as expressing the official opinion of any other person or entity unless expressly stated. No responsibility for the accuracy of the opinions or information contained in the contributor's articles is accepted by any other person or entity. Copyright: This publication is copyright. If you wish to reproduce this article you require a license, which can be purchased here, to do so.
