Home / Analysis / Five key threats to wealth creation – Russell

The 19^th annual Russell Investments/ASX long-term investing report shows the risk for Australian investors who “steadfastly” rely on a singular asset class to achieve their long-term investment goals. For most, residential property is their biggest risk.

The report, which offers a comprehensive comparison between the long-term returns of key domestic and global asset classes, finds Australian shares underperformed residential investment property, global bonds (hedged), Australian bonds and global shares (hedged) per annum for the 10-year period through December 2016. However, revealing the changing fortunes of asset classes over time, the 20-year period through the same end date shows Australian shares outperformed both global shares and bonds.

Pete Gunning, Russell Investments’ chief executive for Asia Pacific, said: “The report’s findings show why more savvy investors are considering diversified multi-asset strategies-designed to efficiently capture new sources of return opportunities-to help build their long-term wealth.

“The performance trends of key asset classes, particularly when combined with our strategists’ view that many markets globally are overvalued, should give investors ample reason to revisit their retirement portfolio exposures.”

The firm’s analysis of the findings identifies five current threats to wealth creation for Australian investors, particularly those who rely on a singular asset class such as Australian shares:

1. Rear-view mirror investing
2. lack of portfolio diversification
3. reliance on residential property
4. investing in over-priced traditional assets, and
5. ‘setting and forgetting’ an investment portfolio.

Some of the key findings in the annual report for the 10-year period through December 2016 include:

• Only residential property, global bonds and Australian bonds exceeded a typical balanced fund target.
• Many growth assets disappointed, including Australian shares and hedged global shares. Both fell further away from the leading asset classes for the period: residential investment property, global bonds (hedged) and Australian bonds.
• While Australian property was once again the top performer, this asset class showed a slight decline from last year’s report with dwelling approvals declining. Our strategist view is that the residential property market is overheated and carries significant stock-specific risk with wide variation between regions, dwelling types and suburbs.

Considering long-term trends identified by this annual report, Gunning said it was long past time for local investors to consider diversifying domestic exposures with global asset classes as well as alternative assets and strategies.

Andrew Campion, senior manager, investment products, at the ASX said: “The most recent update of the Long-term Investing report highlights the need for Australian investors to diversify their investments, as well as consider the impact of costs such as fees and taxes on their ability to obtain their long-term investment goals.”

Tim Cook, director, consulting, at Russell, said: “In an investing environment facing lower returns, slower growth and overvalued markets, we believe investors need access to a wider and deeper set of alternative investment strategies to reduce their reliance on traditional return drivers. Otherwise, many will be unable to grow their assets sufficiently to meet their retirement or wealth-oriented goals.”