Divergent returns between 2000 and 2009

Mike Browne of Seed Investments writes that reflecting back on 2009 we can see that the different asset classes returned widely varying returns over the period.

 Over time it is natural that different assets will perform well or poorly at different times as they all have their own unique attributes. Sure, there will be times when most asset classes perform well, and again when most don't do too well, but there is usually at least one asset class that produces real (inflation beating) returns over any rolling 12 month period.

The above chart shows the returns of selected asset classes for each calendar year in the 'noughties'. You will notice that not once does inflation head the chart, although it does sit near the bottom quite often. The casual observer might therefore point out that it is relatively simple to earn a decent real return. This observer would need to be aware of two points in particular.

The first is that these returns are all quoted before tax and other costs, all gains are taxed in the hands of the investor, with the tax rate on income gains (bonds and cash) typically being higher than the tax rate on capital gains. Return to the investor would therefore typically be below those quoted above.

The second point is that the investor would need to avoid being heavily invested in an asset class when there's significant value destruction. This happened in 2002 to those investors who invested in offshore equities and were hammered both by weakening markets and a strengthening rand, and again in 2008 when all risk assets suffered. Capital protection (i.e. avoiding severe reduction in value) is crucial to staying ahead of inflation over the long term.

It is clear that local growth assets (i.e. real estate and equity) have spent most of the time near the top of the pile, but that 'Balanced' (which is a combination of local asset classes and 15% offshore) is more consistently near the top of the pile.

We do not know the exact order that these assets will fill in years to come, but solid research can improve the probability of getting a good idea. We then use balanced funds (of varying risk profiles) to ease the ride.