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31 Aug 2018

Index Returns

The debate over passive versus active investing has been raging for decades.

Passive investing is focused on reducing cost by holding all the assets in the index in proportion to their current market value while active investing is focused on producing a net after fees return in excess of the index.

Which is best? Active.

Provided that you invest with the right professional managers. For example, Warren Buffett and Charlie Munger have been Portfolio Managers for Berkshire Hathaway Inc which has delivered a 19.1% compound annual rate of return net of fees over 52 years versus the S&P 500 index which has returned 9.9% for the same period (see table).

Double the index return after fees is a great win for investors.

Interestingly, index returns have been falling for a number of years. For example, Australian shares have fallen from 12.0% per annum to 9.1% per annum in compound rate of return over 30 years to 30 June 2018 versus 30 June 2012. This is a 24% decline in the compound rate of return from 2012 to 2018 (see charts).

Why? Falling interest rates.

The 30 years to 30 June 2012 compound rate of return had interest rates in high double digits in the starting 10 years while for 30 June 2018 the interest rates had already dropped.

Falling interest rates have been a core driver for growth assets prices (property, shares) and defensive asset prices (bonds) over the past four decades.

The problem however is that interest rates have now stopped falling which is bad news for growth assets prices (property, shares) and defensive asset prices (bonds) and makes the return from passive investing even less attractive.

In addition to rising interest rates going forward, let’s also not forget to throw in the odd financial catastrophe which will cause fear and panic and present investors with the best opportunity to buy even more quality assets at reasonable or better still discounted prices.

WARNING, past performance is no guarantee of future performance and the above does not constitute Personal Advice.


At Newealth we are always looking to support and promote our clients wherever possible and if you have any ideas or comments, please feel free to email me or to call me on +61 2 9267 2322.

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