“Most people would do well to have some property, but not too much, some cash but not too much, some bonds but not too much, and some shares but not too much. The bonds should be of high quality and the shares should be in the right type of share fund. Both bonds and shares should be on and offshore, and widely diversified.”
Not too much, just look at the Christchurch situation. In addition think about the removal of depreciation tax deductions for property investors, the Global Credit Crunch, & banks looking for bigger deposits.
Add the fact that people are reluctant to borrow heavily to buy property nowadays, and it seems pretty likely that property will be very slow for a long time. Remember too that property is not liquid, as you cannot get cash out of it in a hurry.
Not too much as cash earns very little interest, especially after tax; however it is safe and available at short notice. When things are bleak and you need money in a hurry, cash is king.
I note that Suzie Orman on CNBC recommends people in the USA keep the equivalent of 8 months income in emergency cash reserves – probably good advice.
Over many years bonds have outperformed cash by about 1% to 3%. However not all bonds are equal, and they range from almost no risk down to junk.
It is important to stick to the high quality end and diversify widely, both in NZ and offshore.
Shares over time outperform bonds by about 3% to 5%, but it takes time and you must have the right type of share fund – asset class funds such as DFA are superior. The wrong type of shares are those which are not well diversified, and those where someone is stock picking or forecasting – it does not work .
That is the conclusion reached over many years of research by Eugene Fama, winner of the Onassis prize for services to global finance in 2009.
Cash, bonds and shares are all liquid too, meaning you can access cash at short notice too, something you cannot do with property.
The BBQ food was ready by this time so I concluded with;
“If you spread your money around like this, you will make good money when things are good*, and you will also survive any bad times pretty well too.”
*Historically share markets have had many more good years than bad years.