Imagine investing $100 in 1926 – look what would have happened

Imagine if you invested $100 back in 1926 -  the following chart from AMP's Shane Oliver shows what would have happened.

It's obvious that over very long periods the power of compounding works wonders for shares and property compared to bonds and cash.

Australian residential property delivered an average total return (capital growth plus net rental income) of 11% pa over the last century, which is similar to the return for shares.

What about gearing?

Of course, what this doesn't show is how the much better property performs because of the benefits of gearing and leverage.

If you had $100 to invest back in 1926 could have bought $500 worth of property and your returns would be significantly higher than you if you invested in shares.

Shane Oliver explains:

The key is to allow for the different "risks" experienced by property versus shares.

Property prices are less volatile than share prices as they are not traded on share markets and so are not as subject to the whims of investors and movements in their values tend to relate more to movements in the real economy.

But residential property takes longer to buy and sell and it’s harder to diversify as you can’t easily have exposure to hundreds or thousands of properties exposed to different sectors and countries like you can with shares.

So, there are trade-offs between residential property and shares.

All of which highlights, along with the diversification benefits of a real asset like property, the case to have it in a well-diversified portfolio along with listed assets like shares, bonds and cash.

Note: Given their long-term returns and diversification benefits, there is a key role for residential property in your investment portfolio - putting aside the current threat to the housing market from poor affordability and rising interest rates.

About Michael Yardney Michael is the founder of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and one of Australia's 50 most influential Thought Leaders. His opinions are regularly featured in the media.