Fact or fic­tion: Scott Phillips

Per­haps it’s time for the or­tho­dox view to be turned on its head

Money Magazine Australia - - CONTENTS - Scott Phillips is gen­eral man­ager of The Mot­ley Fool. You can reach him on Twit­ter@TMFS­cottP and via email Scot­tTheFool@gmail.com. This ar­ti­cle con­tains gen­eral in­vest­ment ad­vice only (un­der AFSL 400691).

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.

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