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Medium Term Return Expectations

Posted by Scott Keefer on Sep 1st, 2008

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 we 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.

This figure is very consistent with the figure we use for our clients who are in draw down mode in retirement. We consider a draw down rate of 5% in real terms as sustainable.

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.

Take a look at our Building Portfolios web page for more information on how we recommend clients build effective portfolios.

Regards,

Scott Keefer

www.acleardirection.com.au

2 Comments to “Medium Term Return Expectations”

on 04 Sep 2008 at 1:12 am1Dhukka

The more I read of Shane Oliver the more I wonder how this guy has any credibility left.

This is the same guy, that whilst the credit crisis was clearly taking hold in the US was forecasting the All Ords to break through 7000 in the first quarter of 2008, saw writedowns maxing out at $100 billion (now $500 billion and counting) saw no slowdown in consumer spending and no US recession.

Unfortunately you can’t check how bad he’s been with his calls on “Oliver’s Insights” because they only keep the last 6 months worth. Thus previously errors are erased.

Whilst the S&P500 lost 50% value in the 2001 - 2003 bear market, the subsequent bull market started out at the highest valuation level (on a 12 month trailing P/E basis) in history and thus subsequent returns to now have underperformed terribly. Currently the trailing 12 month P/E in the S&P500 remains above 20 and thus if July was the bottom in stocks (not my forecast) US equities can more than likely expect sub par returns once again in the coming 5 - 7 years.
on 08 Sep 2008 at 9:19 am2cij

Hi Dhukka!

We concur with you regarding Shane Oliver. 8 months ago, he wrote in the Oliver’s Insight article about Australia’s debt level. We had to refute his article at Aussie household debt not as bad as it seems?!