9. Investing in Growth Assets
| Clients |
Matthew |
| Comparison |
Julie, Matthew's friend |
| In 1984... |
Matthew invested $10,000 of his money in growth assets – Australian equities and shares.
Julie left her $10,000 savings in sitting in different cash accounts and term deposits with her local Bank. Julie’s money was safe and earning credit interest that was paid each month. |
| Result |
After 25 years, Matthew and Julie compare notes to see how their $10,000 has performed. Julie was expecting to have caught up to Matthew because of the significant decline in sharemarket value during 2008. |
|
|
Bank deposits
|
Australian shares
|
|
Starting amount1
|
$10,000
|
$10,000
|
|
Closing amount (10 years)1
|
$44,398
|
$113,297
|
|
Net gain
|
$34,398
|
$103,297
|
|
Net return % pa
|
6.1%
|
10.2%
|
|
Additional assets
|
|
$68,699
|
1 Matthew’s total return was equivalent to the All Ordinaries Accumulation Index, with total returns reduced for income tax. Assumed dividends of 4% pa and franking credits 70%. Julie’s cash returns are the UBS Warburg Australia Bank Bill Accumulation Index. Assumed marginal tax rate for Matthew and Julie of 31.5%.
Julie’s approach has some advantages, but it’s worth pointing out what she missed out on:
- Increases in capital value – The share investments increased in value over time whilst Julie’s original capital of $10,000 remained the same.
- Higher dividends – As the value of the shares increased, so did the amount of the regular dividends.
- Franking credits – The dividends associated with the Australian shares come with the tax benefit of franking credits. The credit interest in the Bank was assessed each year as assessable income.
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