Over the past three decades, U.S. stocks have proven to be the most lucrative investment, yet the standout performer of the past year was listed Australian property, which rebounded strongly due to easing inflation and a surge in data centers.

An investor who placed $10,000 in the S&P 500 on July 1, 1994, would have seen it grow to $237,000 by June 30, 2024, according to  data from Vanguard Australia. This represents an annual return rate of 11.1% and an overall growth of more than 2200%.

By comparison, the same $10,000 invested in the S&P/ASX All Ordinaries Index would have reached $135,000, making Australian shares the second-best performer over the same period.

These 30 years encompass significant events like the Asian economic crisis, the dot-com boom and bust, the 2001 U.S. terrorist attacks, the global financial crisis, Brexit, the COVID-19 pandemic, and various wars. It serves as a crucial reminder that despite periods of volatility, long-term investment in global companies often yields substantial returns.

Bear markets typically last less than a year and are usually followed by bull markets that average 6.5 years.

However, recovering from significant market downturns can take time, with recovery periods over the past 30 years ranging from five to fifteen years, depending on the asset class.

Winners and Losers

U.S. shares emerged as the top performer over the 30-year span, ranking as the best performer in eight of those years and the worst in only two. Conversely, cash was the poorest performer, leading in returns just once (in 2007-08) but coming in last six times. As a result, $10,000 invested in the Bloomberg AusBond Bank Bill Index on July 1, 1994, would have grown to just $34,552 by June 30, 2024, with an annual return rate of 4.2%.

International shares turned $10,000 into $105,082, while Australian listed property and bonds returned $94,587 and $51,797, respectively.

The Rise of U.S. Shares

The S&P 500’s growth was primarily driven by tech stocks, including the “magnificent seven” – Apple, Microsoft, Nvidia, Amazon, Alphabet (Google), Meta (Facebook/Instagram), and Tesla. But the S&P 500’s impressive performance goes beyond the tech revolution.

There are multiple favorable factors at play including low starting valuations 30 years ago, high fiscal debt levels, and structurally low-interest rates in the U.S. economy, which have bolstered corporate profitability.

However, the outlook for U.S. stocks may not be as optimistic. In environments where the interest rate cycle shifts, company earnings typically decline over the following two years. Highlighting the concentration risk posed by the “magnificent seven,” which have high growth and margin expectations embedded in their current valuations.

Best Investment in 2023-24

Contrary to the 30-year trend, Australian listed property was the best-performing asset class in the year ending June 30, 2024, with a return of 24.6%. U.S. shares followed closely with 24.1%, and international shares returned 19.9%. Australian shares lagged with a 12.5% return, while higher interest rates boosted the return on cash to 4.4%, outperforming Australian bonds at 3.7%.

However, you should not be chasing past year’s returns, as last year’s winners could be next year’s losers. The recent performance of Australian listed property underscores this point. In 2022-23, these assets returned 8.1%, and in 2021-22, they were the worst performers with a negative 12.3% return.

Another key factor in the strong A-REIT return was the index’s significant exposure to Goodman Group, which accounted for more than 40% of its weighting. Goodman benefited from the rise of online shopping and artificial intelligence, leading to a 70% surge in its shares, which propelled the index higher.

Five Key Lessons for Investors

1. Risk and Return Relationship: Cash reached a high return of 7.8% in 1995-96 but never posted a negative return in 30 years. In contrast, Australian shares hit a high of 30.3% in 2006-07 but recorded negative returns in seven out of 30 years. This highlights the importance of understanding your risk appetite and choosing asset classes that match your risk profile.
2. Understand Your Investment Horizon: The performance of different asset classes over 30 years is insightful, but not all investors have such a long horizon. It’s crucial to align your investments with your timeline, whether that means opting for lower-risk government bonds for shorter periods or taking on more risk with equities for longer-term growth.
3. Diversification Smooths Returns: In years when global shares posted negative returns, cash and Australian bonds often yielded positive returns. A diversified portfolio, evenly spread across asset classes, would have grown to $109,750 over 30 years, offering a balanced approach with smoother returns.
4. Stay the Course: Long-term investors who resist the urge to sell during volatile periods are often rewarded. For example, an investor who held onto an ASX300-tracking ETF during the COVID-19 crash would have seen a significant recovery by June 2024.