Question:

Do shares really outperform all other asset classes over the long-term?  If you claim it does; do you have any proof do back up your claim?

If it is true that shares outperform all other asset classes in the long-term; why is this so?  I constantly hear you say this; it'll be easier for me to accept if I understand why this should be so.

Answer:

When developing an understanding of asset class performance and behaviour, the only tool available to investors is to learn from history and, more importantly, the way capital markets have a way of repeating themselves.

The statement that equities outperform other asset classes over the long term does hold true and there are a number of comparisons circulated and all sharing the same story. Although the figures vary according to exact dates, the general picture remains.

Go to page three for a table that compares the returns generated by all the various asset classes over 10 year rolling periods...

As you can see in the table on page three, it is taken over 10 year rolling periods to ensure that short-term market corrections does not distort the picture.

Assets are reflected from the most volatile (on the left) through to the most conservative (on the right) and measured against inflation.

What the table reveals is that the more aggressive the asset the higher the return.

One deviation from this trend is that of listed property, which has surprised the market by beating equities, especially over the last 10 years. Expectation is that it should lag equities by between two percent to four percent annually and questions abound as to whether this outperformance has run out of legs — time will tell.

This is a perfect illustration of the importance of diversification and, although it provides sound risk management benefits, sometimes holding a mix of assets can provide surprising results from unexpected places.

The above table is based on a tax rate of 30 percent and should one have a higher tax rate, this would negatively impact the property, bonds and cash returns.

Article continues on pages two and three: Why shares provide better long term returns and a table that compares the returns generated by all the various asset classes over 10 year rolling periods...