Residential property vs shares since 1926

The residential property versus shares debate is popular and can be as fiery as political and religious debates. So I’m often asked about comparisons of the long term returns.

Following is some commentary I came across from Dr Shane Oliver, Chief Economist and Head of Investment Strategy at AMP Capital Investments. (Emphasis added by me.)

After allowing for costs, residential investment property and shares generate similar long-term returns. This can be seen in the next chart, which shows an estimate of the long-term return from housing, shares, bonds and cash.

Over the long term, the returns from housing and shares tend to cycle around each other at similar levels. In fact, both have returned an average of 11.5% p.a. over the last 80 years or so. While housing is less volatile than shares and seems safer for many, it offers a lower level of liquidity and diversifcation. The bottom line is, once the similar returns of housing and shares are allowed for, and these characteristics are traded off, there is a case for both in investors’ portfolios over the long term.

 

Source: Oliver’s Insights, Edition 37 – 25 November 2010, ‘Australian housing – is it a bubble? What’s the risk?’

In Investing, It’s When You Start And When You Finish

Is investing about timing the market or time in the market or…?

Ed Easterling of Crestmont Research has produced a very interesting illustration of your average annual return depending on when you bought and when you sold your investment. The chart is based on the Standard & Poor’s 500-stock index for the United States of America and goes back as far as 1920 (i.e. before the Great Depression.)

The  New Yorks Times have republished the chart here.

Not surprisingly using long term average returns is very deceiving. Your wealth creation will be greatly affected by the sequence of returns during your investment time frame.

For me this illustration reinforces the importantance of annually reviewing your progress and making adjustments to your strategy and saving rate.

It also reinforces the folly of blindly ‘investing‘ in the share market with a short term view, expecting to make great returns. Short-term trading is for professionals and those playing with loose change from their deep pockets.

(Thanks to loyal reader Gihan for alerting me to this illustration.)

Introducing the new Australian share volatility index

Are you interested in the expected volatility of the share market? Then get some VIX. From tomorrow a new Australian equity volatility benchmark will be published by Standard & Poor’s (S&P) and the Australian Securities Exchange (ASX). The benchmark will be known as the S&P/ASX 200 VIX (ASX code: XVI). Following are some key highlights from the information provided by S&P and the ASX.

Are you interested in the expected volatility of the share market? Then get some VIX.

From tomorrow a new Australian equity volatility benchmark will be published by Standard & Poor’s (S&P) and the Australian Securities Exchange (ASX). The benchmark will be known as the S&P/ASX 200 VIX (ASX code: XVI).

If you are familiar with share market investing you will note the similarity to the VIX index published by the Chicago Board Options Exchange (CBOE). In fact the Australian index will use the same methodology (under licence of course).

You can learn more about the volatility index and download a fact sheet on the ASX website here.

Following are some key highlights from the information provided by S&P and the ASX. If you get lost in all of this it’s ok – you don’t need to know it to successfully create wealth.

What the VIX is

The index measures the expected volatility of the top 200 shares listed on the ASX. Since it is a forward looking index, in a way it is like trying to put science around a crystal ball.

Expected volatility is calculated using the settlement prices of call and put options, which are derived from expected future prices of the underlying share.

Using and interpreting the volatility index

In regards to using the index I like this quote in the media release from Richard Murphy, ASX General Manager, Equity Markets, who said:

“observers of the index will have insight into the degree of uncertainty among investors and their expectations regarding the magnitude of future movements in the local equity market.”

Also from the media release is this tip on how to interpret the index:

“A volatility index at a higher level generally implies a market expectation of large changes in the S&P/ASX 200 over the next 30 days, indicating that investor sentiment is uncertain. Conversely, a lower volatility index value generally implies a market expectation of little change, suggesting greater levels of investor confidence.”

Should you care about the volatility index?

The index looks forward 30 days so it is very short term. That really is only of interest to short term traders and anyone contemplating making a purchase or sale of a direct share during that period. If you are investing for the long term you can probably ignore it and focus on enjoying the other elements of your life.

Further the index is non-directional – volatility is both ways. You don’t know if investors expect the fluctuations to be mostly up or down. So you can’t really interpret from the index that the market will go up or down and therefore you should either buy now or wait, respectively.

So unless you actively trade direct shares you are better off concentrating your energies on other financial elements. (Unless you want to impress people at the next barbecue with comments about how fearful or not investors are.)

Updated: AXA guide to investment markets

Have you been watching the investment markets fluctuate over the past year and wondering if you should be getting back in, or just in at all?

If so you may be interested in this perspective published by AXA Australia today called Charting The Future – Guide To Investment Markets.

This is an updated version of the AXA Guide published in February. You can read that version here.

What do you think of the AXA guide?

Please let me know your reaction to the AXA guide in the comments section below.

Was it informative or too full of jargon? Did it take you closer to making an investment decision? What else would you want to know? Please share your thoughts below.

Average duration of Australian bull and bear markets

Zurich have published this graph showing the average duration of Australian bull and bear markets from 1970 to December 2009. The index used is the ASX200. Download the graph here.

Average Australian Bull Market

Average Bull Market Duration: 38 months
Average Annual Bull Market Return: 30.8%

Average Australian Bear Market

Average Bear Market Duration: 15 months
Average Annual Bear Market Loss: -31.1%

Interesting, but don’t put too much weight (if any at all) on these sort of statistics when making your investment decisions.

A guide to investment markets in 2010

Reading the Signs. A guide to investment markets in 2010. By AXA Australia, February 2010.Have you been watching the investment markets recover over the past year and wondering if you should be getting back in, or just in at all?

If so you may be interested in this perspective published by AXA Australia today called “Reading the Signs. A guide to investment markets in 2010.

The guide is easy enough to read without much jargon and covers some of the key aspects that I hear are on many people’s mind.

In conjunction with reading this guide I recommend you review my video article on “How to decide when to start investing again.”

If you decide you want to participate in the recovery by investing but are nervous about picking specific stocks or even managed funds then remember to always start simple. The easiest, simplest and also lowest cost way to invest is by using a index managed fund. Your return will be the market return – so if the market goes up you should also make money. (To learn more call me.)

What do you think of the AXA guide?

Please let me know your reaction to the AXA guide in the comments section below.

Was it informative or too full of jargon? Did it take you closer to making an investment decision? What else would you want to know? Share your thoughts below.

Trading in Exchange Traded Funds

Exchange Traded Funds (ETFs) are like traditional managed funds (which you may be familiar with) but they are instead traded on a stock exchange like other company stocks.

For do-it-yourself investors it is handy to know about ETFs and how they work. It is also important to understand how they are different to Listed Investment Companies (LICs).  To learn a little more about how ETFs work I recommend this brief article from Vanguard Investments Australia called “ETFs: Market Making, Spreads and Liquidity“.

How long markets have taken to recover

The Reserve Bank of Australia’s Statement on Monetary Policy (released 6th February 2009) included the following graph of the largest falls in Australian equities (aka shares). As the RBA note in their report “Historical experience indicates that, following large falls, it can take between three and six years for the share market to recoup losses”.

aust_equities-falls-rba.jpg

Read the full report on the RBA website here. The above graph is graph 65 on page 47 of the report.