Realistic Medium Term Return Expectations

The more I read from Shane Oliver, the more I become impressed with his balanced assessment of the current economic and investment conditions. Over the weekend I read an article of his published in the Australasian Investment Review, a freely available online publication – Super Returns: Don’t Be Greedy.

In the article Shane provides an analysis of the medium term return potential in investment markets. He begins by commenting that recent returns from 2003 to 2007 were well above sustainable levels. This is an opinion that I subscribe to. He goes on to look at indicative return expectations for the medium term using some simple models.

From these models he provides the following projected returns:

Dividend Yield Growth Return
US Equities 2.4, 5.2, 7.6
UK Equities 4.6, 4.2, 8.8
European Equities 4.3, 4.0, 8.3
Japanese Equities 1.9, 3.0, 4.9
Asia ex Japan 3.5, 8.0, 11.5
World Equities 3.0, 4.9, 7.9
Australian Equities 4.6, 5.7, 10.3
Unlisted Commercial Property 6.3, 2.5, 8.8
Aust REITS 7.6, 2.5, 10.1
Global REITS 6.4, 3.3, 9.7
Aust Bonds 5.7, 0, 5.7
Aust cash 5.5, 0, 5.5
Diversified Growth Mix
30% defensive, 70% growth 8.5

Oliver confesses that there are some drawbacks with the models but overall he is comfortable with the results.

Based on this data, investors with a reasonably balanced portfolio would be looking at 5.5% real returns (after the impact of inflation) over the medium term.

The key message for me from Shane Oliver’s analysis is that we all need to be realistic about the returns we should expect from our investment portfolios. We would all love these returns to be higher, and maybe we will see a strong bounce back over the next few years. However we need to be prepared that throughout history growth asset investment markets have tended to provide returns of 5 to 6% above inflation. If you plan using these expectations and develop your portfolio so as to avoid the erosion of returns through high fees and heavy trading strategies you are much less likely to end up disappointed with your investment experience.

Regards,
Scott Keefer