There's no Insight in Hindsight!
With so many articles talking about a re-rating in the equities risk premium (the return above cash that investors are demanding in order to invest in shares), this month we're tackling the thorny issue of asset allocation. It's quite true that we do have an equities culture here in Australia, especially compared to Europe and Japan where many investors have preferred the safety of government bonds (although they may not be happy with the low yields on offer at the moment). So, have we Aussies got it all wrong? Is the world such a scary place that most investors should invest more in defensive asset classes than in the past? It's a very important question as the growth/defensive allocation is perhaps the biggest decision for any long term investor.
The Past
Our own studies have shown that over the medium to very long term Australian shares have performed quite well. In fact, since 1886 shares have produced a median return per annum of 11.86% - a nice statistic but who has a 126 year time horizon for their investment? Still it's worth a look at the historical evidence. The following chart shows the number of years where share returns exceed defensive investments (we've used 90 day Australian bank bills as a proxy for a safe investment) and as you'd expect most of the time they do. On a year by year basis, shares outperform 74% of the time and on average they outperform by 7.8% (these are nominal numbers so naturally you won't typically see such high returns in periods of low inflation). We've also highlighted the last four years where you can see that three out of those four years we've had disappointing returns. 
Indices:
The All Ordinaries Index has moved down over the past week decreasing 3 points (or -0.07%) since closing last Thursday to 01:30 pm this Friday.
The rest of the world as measured by the MSCI index is down 5 points (or -0.4%) from closing last Friday to end of trade Thursday.
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