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Different returns from different product types

Portfolio Lower risk/return Medium risk/return Higher risk/return
1. Growth assets (shares, property) 30% 50% 70%
2. Income assets (cash, fixed interest) 70% 50% 30%
3. Total 100% 100% 100%
4. Expected before-tax nominal return 7.4% 8.2% 9.0%
5. Expected after-tax nominal return 5.0% 5.6% 6.1%
6. Less fees (after tax) >0.9% 1.0% 1.1%
7. Less inflation 2.0% 2.0% 2.0%
8. Expected after-tax real return 2.1% 2.6% 3.0%
9. Expected after-tax real return in any one year is likely to be -0.6% to 4.8% -1.7% to 6.8% -2.8% to 8.8%

[no-glossary]

Source: Frank Russell Company (NZ) Ltd, Investment Consultants. Neither Frank Russell Company (NZ) Ltd nor the Retirement Commission can provide any guarantee of returns on investments, but this table is based on extensive research.

The chart shows some general rules about investment:

Over the long term higher risk products will generally provide higher returns (see line 4).

  • Managers's fees are generally higher for higher risk products (see line 6).
  • The volatility of returns is greater with higher risk products (see line 9). What this shows is that the annual after tax return (interest, dividend, plus or minus capital growth or loss) for a lower risk product will generally vary between minus 0.6% and plus 4.8%. On the other hand the annual variation for a higher risk product would be from minus 2.8% to plus 8.8%.
  • For long term savers a small improvement in the annual return can make a very significant increase to the fund savings figure.

Limitations of this example

A note of warning. The figures in this chart are based on average investment returns over a very long period and also average fee rates, tax rates, and inflation rates. In the market place at any time there will be products and schemes within each category which perform better or worse than average for a number of reasons, including:

  • The mix between growth and income assets varies and diversification of products varies.
  • The level of fees vary. The average fees used in the chart range from 0.9% to 1.1%. The actual range of fees currently being charged is from as low as 0.3% to around 2.0%.

The tax treatment of different products can vary as can the tax rate payable by individual savers.

So don't use this chart as a strict guide to how any particular product will perform.

The size of returns

You may not be impressed with the relatively small difference between the net results in line 8. But 0.9% over and above 2.1% return is actually 42% better than the original result.

Glossary: capital growth
When the value of your investment (your capital) grows. If you invested $100,000 in shares last year that are worth $110,000 this year, your capital growth is $10,000, or 10%.
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