Equities outperform other asset classes by far!

Equities outperform other asset classes by far!

The following graphs, compiled by Olof Bergh of Sanlam Private Investments, show how Equities outperformed other asset classes like Bonds, Cash and Residential Property as well as Inflation over a long term. We look at the performance in nominal and real terms as well as without Tax and after Tax.

It is assumed that residential housing earns no income as it is assumed that the owner resides in the house. At the same time no rates and taxes are charged against residential property. Thus only the capital appreciation is considered when measuring the returns for residential property.  Tax is quite complicated, but we simplified the matter in this study by assuming that dividends are received free of tax by individuals and that other income from fixed income instruments are taxed at a marginal tax rate of 40%. Because of the long-term nature of the study, Capital Gains Tax is not considered for any of the asset classes. We used log scales for all graphs.

First we look at the total nominal return from 1966 to 2012 without Tax.

R1,000 invested in 1966 in Bonds, Cash and Property would have grown to about R100,000 in nominal terms (without taking inflation into account). The same R1,000 lump sum investment in Equities with dividends reinvested, grew to R1,3m. If we look at it in real terms by taking inflation into account (graph below) the difference is still startling with a long period of negative returns for Bonds, Cash and Property in the 80’s when we had high inflation.

When we take Tax into account the returns on Cash and Bonds decline dramatically. No tax is payable on returns on Equities and Property.

If we adjust for inflation (real returns), the returns on Cash and Bonds are extremely negative over this period. This is however assuming a 40% Tax rate.

Lastly we look at the importance of reinvesting dividends. We saw in the first graph that R1,000 invested in equities would have grown to R1,3m in nominal terms. However, the capital appreciation was only R211,000, although still better than the R100,000 of other asset classes. The rest of the return was because dividends grew and were reinvested, growing the capital base and future dividends.

– Gerhard Lampen

Head, Sanlam iTrade


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