Fact or fiction: Scott Phillips
Perhaps it’s time for the orthodox view to be turned on its head
There’s nothing safer than cash in the bank, right? Well, that depends on quite a few things, really. Yes, No. 1 is the safety of the banking system (and the willingness of the government to step in). But there are other, more hidden risks.
Let’s say the Australian dollar – for one reason or another – falls meaningfully against world currencies. Your $100 used to buy a decent pair of jeans but those jeans are now going for $140, thanks to the impact of that devaluation. Yes, you still have your money but how much does it buy? The same is true of a more insidious thief: inflation. Oh, it’s only small, right? Yet compounded over a lifetime it’ll likely take more than half of your money away (measured by purchasing power).
Risk is a funny thing. We’re afraid of terrorism or plane crashes because they’re big, sudden and catastrophic. But have you looked at the nation’s waistlines recently? Many – maybe even most – of us will die from the consequences of a poor diet and lack of exercise but how many such headlines do you see? How many people are putting that at the top of their “Ways I don’t want to die” list?
Which brings us back to one of the oldest comparisons in the book: bonds versus shares. Shares come in different shapes and sizes, of course. There’s the century-old market-beating, dividend machine Washington H. Soul Pattinson (ASX: SOL), and then there’s the besieged Blue Sky (BLA), GetSwift (GSW) and Unlockd – the latter just missing out on an ASX listing before entering administration. Sounds risky, huh?
But bonds aren’t all the same, either: the stodgy, reliable government bonds (unless we’re talking Russia or Venezuela, of course); the higher-risk, higher-yielding company bonds; and the euphemistically named “high-yield bonds”, which used to be called junk bonds before the PR teams got to work.
It’s a very good bet that shares in Soul Patts are immensely safer than the median junk bond. And that Australian government bonds are safer than the average speculative gold explorer at the shallow end of the ASX.
And on average? Well, despite the general misconceptions, the 30-year return from Australian shares and Australian bonds are almost identical. According to Vanguard, the latter has delivered an average annual return of 8.5%. And shares? An almost identical 8.4%.
Shorter time frames add a little more colour – and volatility. Over two decades, for example, shares have a commanding 2%pa advantage. That advantage reverses – and more – over the past decade, when bonds (6.2%pa) have shown shares (3.5%) a clean pair of heels.