To the extent you are interested in this stuff, we appear to have seen the bursting of the mother of all bubbles: the Australian sharemarket, which has declined in value by a much larger margin than even US house prices. But for some reason you rarely read about it. Gold, on the other hand, has yet to endure any real correction, and, as Rory Roberson has observed, looks by far the best candidate for the 'bubble' moniker.
One other stand-out feature of the chart is the very low volatility displayed by residential property if, and only if, you can access an extremely well diversified portfolio of it, which, it should be noted, most of us cannot. This is evident in the exceptionally low variability of the blue and orange lines. By way of contrast, the light blue line zig-zags about all over the shop, which is a vivid illustration of the much higher probability of loss one is subject to when investing in shares. And this analysis assumes you have the benefit of holding every single company in the All Ordinaries Index.
We have long suggested that equities investors might experience a protracted period of very poor performance following the GFC-induced downturn. And our predictions appear to be proving out. Notice how the Australian shares line remains well below its 2007 peak. And remember it is mid 2010. As I have pointed out many times before, this is very similar to what happened after the 1987 crash--it took nearly a decade for the index to consistently breach its previous highs.
Here one sleeper issue for asset-allocation is the ageing of Australia's population. Local pension funds are massively overweight listed equities, with an average allocation of around 60 per cent (higher if you include self-managed super). This is around double the weight the Future Fund has chosen to make to the sector. The result is that members are exposed to unnecessary risks. We have been at the vanguard of arguing that super funds should have far greater allocations to lower-volatility categories, such as fixed income.
One defence tendered by industry "advocates" is the notion that younger members with longer time-horizons should have higher holdings of risky shares (since they can purportedly ride out the volatility). While this may be true, the fact is that the super fund membership base is rapidly ageing. As members age, they become much more risk-averse and therefore desire investment exposures to assets that provide certainty and security. Once again, read fixed income, and patently not equities, or commercial property, for that matter.
