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Investors often look for greater returns from Shares in a trade-off for their short term volatility and risk of loss. Bonds (fixed interest investments) are seen as the less risky, yet lower yielding alternative.

However, because of the recent bear market, Shares have underperformed in the US and only outperformed Bonds by 2%pa over the last decade in Australia.

In this article Dr Shane Oliver believes that the last two years proves nothing about Shares’ merits.

Even so, many investors are wary of the short to medium term prospects for Shares and this article Dr Oliver looks at the prospective returns over the coming year. He concludes that shares offer attractive risk premiums over bonds. Shares may be vulnerable to a correction after their sharp gains from March but this will merely be a short-term pullback in a still rising trend.

Kind regards,

Boyd Wrightson CFP®,
Gary Powell CFP® ,
Ben Walker Adv Dip FP,
Daniel Spaapen G Cert FP and
David Wrightson Dip FP

Regards

Gary Powell

CERTIFIED FINANCIAL PLANNER™
and Authorised Representative

Interwest Financial Services
6 Charles Street
South Perth WA 6151 Australia
PO Box 263, South Perth WA 6951

T : 08 6436 0000
F : 08 6436 0099

E : advice@interwest.com.au
W : www.interwest.com.au

   

Information Update: August 2009

Are Shares offering enough of a risk premium over Bonds?

Are Shares offering enough of a risk premium over Bonds?

|Newsletter->Brought

• The equity risk premium is the excess return that shares provide over a ‘risk free’ asset like government bonds.

• It is perceived that shares should return between 5% to 7% per annum (pa) over bonds because this is what their excess return has been over much of the post-war period. However, this likely exaggerates the required excess return for shares.

• Due to the recent bear market, shares have struggled when compared to bonds over the last decade. This should not be interpreted as meaning that shares are a dud investment. In fact, thanks to current low government bond yields and higher dividend yields on shares, shares should provide a good risk premium over bonds for the decade ahead.
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Interwest Financial Services Pty Ltd ABN 99 008 956 876, Ben Walker and David Wrightson are Authorised Representatives and Credit Representatives of AMP Financial Planning Pty Limited ABN 89 051 208 327 AFS Licence No. 232706 Australian Credit Licence No. 232706. This article contains general information only. It does not take into account your objectives, financial situation or needs. Please consider the appropriateness of the information in light of your personal circumstances.