There is a long standing debate centering around which asset class is best. Most people can agree on the top two asset classes – property and shares – but debate on their order i.e. which earns an investor higher returns. Below is a table I have created to show the performance of 5 different asset classes from 2004 – 2013.
| Asset Class / Year | Bonds (15 Yr) | Equities (All Shares) | Property (Residential + commercial) | Cash (Building Society) | Inflation (RPI) |
|---|---|---|---|---|---|
| 2004 | 7.2 % | 12.5 % | 18.3 % | 4.2 % | 3.5 % |
| 2005 | 8.4 % | 21.4 % | 19.1% | 4.0% | 2.2 % |
| 2006 | 0.1 % | 16.4 % | 18.1% | 4.4% | 4.4 % |
| 2007 | 5.2 % | 5.1% | -3.4% | 4.8% | 4.0 % |
| 2008 | 12.9 % | -29.8 % | -22.1% | 0.9% | 1.0 % |
| 2009 | -1.0 % | 29 % | 3.5 % | 0.3% | 2.4 % |
| 2010 | 9.4 % | 14.1 % | 15.1 % | 0.2% | 4.8 % |
| 2011 | 21.4% | -3. 4 % | 7.8 % | 0.2% | 4.8 % |
| 2012 | 4.8 % | 12.1% | 3.4 % | 0.2% | 3.1 % |
| 2013 | -7.2% | 20.5 % | 10.7 % | 0.2 % | 2.7 % |
| Average | 6.12 % | 9.79 % | 7.05 % | 1.94 % | 3.29 % |
As we can see from the above, Equities or shares have produced the best returns over the past 10 years. This conforms to the view that Equities produce the highest returns as they are the most risky asset class.
But it is interesting to note two things:
- Although equities offer a greater return as seen above, investing in property through a buy-to-let mortgage may actually give you significantly higher returns due to the power of leverage. This is because for a £100,000 house, you only need to put £40, 000 down and your bank puts up the rest. But your gain is on the overall £100, 000 value of the property value and not the £40,000 you have invested.
- Property return = £100,000 * 7.05% = £7, 050. And the other benefit is that if you sell the house for £120,000, you only pay capital gains tax on £20,000 (£120,000 – £100,000) and not your actual gain of £80,000 ( £120,000 – £40, 000).
- Cash s the worst investment as the inflation rate has been double that of cash over the past 10 years. This means that if you save rather than invest your money, your money will be worth less and less as the years go by.
There you go, although equities may at first glance look to be the asset class to provide the best returns, property may in actual fact provide better returns through leverage.