By Leon de Wet
We recently wrote about the ongoing pain for savers, given the likelihood of very low cash and deposit rates going forward. Unfortunately, this outlook has been reaffirmed by the latest RBA announcements.
Having realistic expectations about future total returns is however something even investors with diversified portfolios need to have. This is especially true if your reference point is what the average diversified portfolio has earned over the past decade.
The reason for this is simple – the return on an investment consists of capital growth and income.
Currently the income earned on defensive assets, cash and government bonds in particular, is at near record lows. At the same time, the expected dividend yield from domestic equities is the lowest it has been in years, albeit much higher than most other asset classes. It is also expected to improve as the economy recovers.
As for the capital growth potential from equities, this is likely to be constrained relative to the past, given current valuations both domestically and abroad. While further multiple expansion can’t be completely ruled out, this is unlikely to contribute to returns over the next ten years.
As for bonds, their prices move inversely to yields. Declining yields have been a massive tailwind to bond total returns, something unlikely to be repeated given ultra-low yields now.
So when will good returns return? With low income, muted inflation and constrained growth it could be a while yet.
If you would like more information please call 1300 ELSTON or contact us to speak to one of our advisers.