15th July 2009
Investing Rule #3 -
Growing rich slowly will never go out of fashion
In our series examining the three (3) immutable rules of investing:
- never put all your eggs in one basket;
- a higher rate of return always equals higher risk; and
- getting rich slowly will never go out of fashion; don’t rush, and always ask questions,
we review the final investment rule of “getting rich slowly will never go out of fashion”.
Warren Buffet perhaps best managed to sum up our third immutable rule of investing: that is keep it simple
and don’t invest to get rich overnight on speculative tips, but invest for longer periods getting
modest stable returns which will be repeatable, when he said
“Investing is not like Olympic diving...you don’t get extra points for degree of difficulty.”
Rates of return: what history shows
Often we hear of investors chasing higher returns because of a recommendation from a trusted
source, but history tells us this is no basis for investing.
For example at the end of June 2009, many superannuation and managed funds and shares reported negative returns
for the third year in a row. World share markets lost value, and even the Australian market
lost ground by almost 40% year on year.
History therefore shows we cannot expect smooth growth year after year. History also gives us a realistic and
useful starting point for what you might expect in the future, especially if you consider a wide range of
markets over a long period of time.
It can also help you resist the danger of losing all your money from chasing unrealistic returns. When
returns from well regulated investment markets go down, disappointed people sometimes get drawn into
extremely risky products or even outright frauds.
100 years of history
Here's what a survey of 100 years of investment returns from 16 financial markets around the world
See Triumph of the Optimists, by Elroy Dimson, Paul Marsh and Mike Staunton (3 academics from the
London Business School), published by Princeton University Press, 2002.
Compound real rates of return after inflation 1900-2000
* Worked out by weighting 16 major markets according
||7.5% per year
||5.8% per year
||1.1% per year
||1.2% per year
|US Bank Bills
||0.4% per year
||0.9% per year
Of course, past performance might not be repeated.
ASIC also consulted licensed actuaries to estimate what returns would be reasonable over the long term
for four of the most common investment options used by super funds and professional investment
managers. These estimates are for returns before any money is taken out for fees and taxes.*
||What it roughly means
||Acceptable rate range
70–80% in shares or property
|Aims for higher returns over the long term and so risks higher losses in bad years.
60–70% in shares or property, the rest in fixed interest and cash
|Aims for reasonable returns, but less than growth funds in order to reduce risk of losses in bad years.
60–70% in fixed interest and cash (some invested in shares or property)
|Aims to reduce risk of losses and therefore accepts a lower return over the long term.
By law, invests 100% with Australian deposit-taking institutions or in a capital guaranteed life insurance policy
|Guarantees your capital and accumulated earnings cannot be reduced by losses on investments.
*ASIC’s licensed independent actuaries consulted a variety of
sources including assumptions used by industry groups, leading asset consultants and publicly available
survey data about superannuation fund investment strategies.
So don't rush your investments and be patient. Aim for modest repeatable returns over a longer period.
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Head of Funds Management
t +61 3 8610 2811
Chris Andrews is the Head of Funds Management for the La Trobe Group and has responsibility for the La Trobe Australian Mortgage Fund.
Read full profile here.
La Trobe is one of Australia's leading independent specialist mortgage Financiers. Its business includes residential mortgages, commercial mortgages, and investment services operating one of Australia's largest Mortgage Funds under AFSL 222213. It employs over 115 staff and has raised over AUD$10Billion to assist over 100,000 customers since inception in 1952.
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