With the market in meltdown, where best to put your funds? David Potts considers the options.
Not that we need another, but the markets would make a gripping reality show. Pit the sharemarket, property and bonds against each other three assets in, only one comes out the winner.
And to keep the punters glued, stretch the whole thing out for five or, even better, 10 years.
Going in, one would be fighting fit (bonds), one flabby (shares) while the favourite (property) has passed its form. In keeping with the genre, let's start with the loser.
ROUND ONE: BONDS
Although far and away the best performer of the three in the past year - heck, bonds are the only category that rose in value and then by double digits - that can't go on.
Even the bond market seems to have all but thrown in the towel - when it's paying only 3 per cent for 10 years, is it really trying?
Yes, because when yields drop, bond prices rise. There's still the prospect of even more capital gains, quite aside from the guarantee of getting your money back eventually.
Switzerland, where they're negative, proves there's no bottom to how far yields can drop. There you pay the government to hold your money for four years. Who would do that? Somebody afraid of losing even more anywhere else.
In the next decade bond yields should average 5.4 per cent a year, a survey of professional asset consultants by actuaries Rice Warner says.
That's twice what they're offering at the moment, in which case the experts are expecting a big drop in bond prices in the future. In fact the only way bond prices could stay this high - or yields as low - would be a devastating global depression.
I know there's a debt crisis in Europe, but could it be that bad?
Of course, there are other issuers of bonds aside from governments. Corporate bonds have much higher yields (about 6 per cent) because they don't have a government guarantee, though realistically you need to invest in a bond fund to get a selection of them.
Even so, same problem. Interest rates are historically low and so must rise in the next five or 10 years. Economists call this a reversion to the mean, though everybody else sees it as getting back to normal.
While bonds as an investment category are safer than either shares or property so long as you're prepared to hang in there, forget a winning return.
"The most hazardous investment would be fixed-rate bonds. This is a spectacular bubble," the managing partner of wealth advisory firm FORM, Tom Murphy, warns.
One other thing. The best performer in one year rarely keeps it up the next, which warns against bonds. Except chances are that in at least one of the next 10 years (and they sure are off to a good start for 2012), they'll be the winner again.
ROUND TWO: PROPERTY
You just have to look at the last decade to see what property definitely won't be doing in this one.
House prices doubled but household incomes rose by only a bit more than half that.
That's why every overseas expert, and a growing number of locals, think property prices rose too far and have some way to fall. "Valuations are double or more than fair value," FORM's Murphy says.
The only question is whether they crash (the foreign view) or deflate gently in real terms thanks to rising incomes (the local view).
They've fallen 5 per cent on average over the past year, according to RP Data-Rismark's index, suggesting a gentle deflation is under way.
And as unaffordable as our property is compared with almost everywhere else, by our standards it's improved in the past year as rates have dropped and incomes risen. Australian property has been a lot more unaffordable before without the bottom dropping out. Besides, "there's a lack of supply and reasonably firm demand," the chief economist at CommSec, Craig James, says.
"There's not a lot of new building population growth through migration is picking up, and there's a tight rental market in the capital cities," he says.
Only the Gold Coast and pockets of Victoria are "sufficiently supplied", which doesn't augur well for their prices.
And the outer suburbs are doomed to low returns because of a generational shift, which, incidentally, suggests units will do better - as in less worse - than houses.
At some point in the next decade it's likely unemployment will rise and that would be a trigger for a "sharp fall" in property prices, Murphy says.
ROUND THREE: SHARES
So bonds and property have knocked each other out. If the sharemarket looked cheap before - the price-earnings ratio is about 15 per cent below the norm - the drop in bond yields makes it positively bargain-priced in comparison.
Taking the difference between the earnings yield on shares and the yield on a 10-year bond, "shares are now cheaper than they were at last year's low on this basis," the head of investment strategy and chief economist at AMP Capital, Shane Oliver, says.
Trouble is, the Reserve Bank can cut rates all it likes, but unless Wall Street takes off our market will remain moribund.
The good news is that American companies are generating record profits, in no small thanks due to the weak US dollar.
As we speak, Wall Street is returning 7 per cent a year after inflation, while a five-year inflation indexed bond is losing a little more than 1 per cent a year.
So Americans can choose to risk losing some or all of an investment in the sharemarket but have considerable upside as well, or take no risk with the bond knowing they'll lose $510.
Hard to see that lasting long.
Setting the price shocks aside, our shares are paying extraordinarily high dividends, especially after taking the 30 per cent tax credit from franking into account.
Russell's Australian High Dividend Index fund, for example, was returning 8.9 per cent a year at the end of May. Indeed, dividend-paying stocks such as Telstra have been doing much better than the rest of the market.
But what about the next five or 10 years?
Based on the legendary investor- turned-billionaire Sir John Templeton's axiom that "the four most dangerous words in investing are 'this time it's different"', leading fund manager Fidelity has calculated what a "reversion to mean" would, well, mean.
THE KNOCKOUT BLOW
The Australian equities manager of Fidelity, Kate Howitt, says for the sharemarket to reach fair value in the next 10 years - that is, back to its long-term trend - it would have to return more than 12 per cent a year, though most of that could well be from dividends rather than price rises.
Unfortunately, she's not saying it will. Still, reversion to mean is a statistical fact. Nor is there any doubt shares are the only growth asset of the three since buildings depreciate and bonds aren't linked to economic growth.
"There's been an amazing recovery in company profitability and it looks quite sustainable. An 8 per cent to 9 per cent a year sharemarket is the Australian long-term expectation, including dividends," the investment strategist at Russell Investment Group, Andrew Pease, says.