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Financial Happenings Blog
Thursday, August 31 2006

Over the 5 years to the end of June 2006 International shares investments have been poor.  Really, really poor.  They have returned around -2% a year for the past 5 years. 

As investors, how should we react to this poor performance?  At A Clear Direction Financial Planning we expect that over the long term all growth asset classes will return around 10% to investors.  About 7% above the inflation rate of 3%.  There are three growth asset classes that we invest in: Australian Shares, international shares and listed property trusts.  By investing in three asset classes with similar average returns we don't change the expected returns from growth asset classes, still around 10%, however we reduce the volatility of the portfolio - because being exposed to three asset classes with the same expected return will smooth the ups and downs of the portfolio. 

Here's the kicker.  The same average return, with less volatility, results in a greater compounding effect in your portfolio - meaning a higher ending portfolio value.  So, regardless of poor returns over 5 years, we are more focused on the fact that international shares are an asset classes that historically has produced good long run returns, and there is no reason that they will not in the future.  They are an important part of our portfolios, and play an important role in providing diversification.

Another underlying reality is this.  No-one knows what investment markets will do tomorrow, this year, next year and going forward.  If we were to decide to have no international share exposure just because it has performed badly in the last 5 year period then we would be trying to guess which market to be in at which time.  And history has shown that this simply does not work! 

One very last comment.  The accepted financial planning wisdom is that a 5 year investment in any asset class is 'long term enough' to ride out the ups and downs due to market volatility.  A five year investment in a fund like the BT international fund has returned -4.08% annually for the five years to the 30th of June 2006.  A 5 year investment timeframe in a growth asset class simply does not guarantee a successful investment experience, and there is the proof!

Posted by: Scott Francis AT 08:01 pm   |  Permalink   |  Email
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