Gold, Land, houses, FD’s, Bonds, Stocks are various kinds of investments and there are various gurus that profess why each one of them is the only investment vehicle and how they made a lot of money investing in it….

Buying anything valuable cheap is always a great way to make money, but this is not easy and doing this consistently over a long period of time is close to impossible.

Here we will look at a long term expected returns from each of these asset classes and the reason there of…

Gold… Gold is very popular metal and there are many who swear it is a great investment. Lets understand this better. The total amount of gold in the world will fill about 10 Olympic sized swimming pools (or as big as 10 storied building).  Gold in the long run can be expected to represent a certain proportion of the wealth in the world…lets say if the world wealth is 100 trillion and gold represents 10% then it will be worth 10 trillion and if the wealth goes up to 200 trillion then the gold will still be worth 10% so it will be worth 20 trillion.

Gold, Land are types of assets in which creating any incremental quantity of them is very expensive and hence they can be reasonably expected to represent a fraction of the world wealth… the fraction may change from time to time but the long-term value is determined by the fraction of the overall wealth it represents.

Property values are typically linked to the land value, with most of the value being represented by the land and a small fraction of the value being attributed to the building itself. If we look at the rental yields, they can be represented as a % of the property value (greater the property value, greater is the expected rent and vice versa). Retail rental yields (annual rent) are usually between 1.5% to 3% of the property value and commercial rental yields are between 4% to 7% of the property value.

Equities represent investments in business – business are the ones which create additional value and are able capture that value. For instance, Apple created value by designing products like iPhone and iPad that create value and are able to capture value by pricing them at a premium. Businesses growth in the long run will represent the growth in GDP of the country. Any increase in prices of business inputs can be passed on to the customers. Long term returns from investments in equities can be expected to be equal to GDP growth plus inflation rate. Please note not all businesses will have this, some will be lower, and some will be higher, we are discussing the long term averages for each asset class and GDP growth + Plus inflation can be the long term expected return from Equities.

Equities represent the wealth creation and will add to the net wealth of the world.  As discussed, earlier value of Land and Gold will be linked to the net wealth of the world.

Bank deposits, bonds etc are loans to businesses. Rate of return expected from loans to business can be expected to be lower than the rate of return of Equity – else equity investor will want to be a leader than investing in Equities. Loan rates in the long term should be slightly more than the inflation rate (if its is less than inflation then the lender will not be interested in lending, they are better off consuming today.).  Risker loans may have a greater interest rate reflecting the risk, but there will be some defaults as well, if we incorporate al that as an asset class Debt can be expected to have a return which is slightly more than the inflation.

As we said in the beginning buying anything valuable cheap is a great way to a get a good return, but in the long run a consistent investor should expect returns which are in line with the metrics mentioned here.

In summary

• Wealth in the world = Precious metals + Land + Value of all the businesses
• Business is the only part where the value can increase. Precious metal and land will represent a fraction of the wealth in the world, the fraction they represent may change slightly over time, but they don’t add any value so their value will always be a fraction of the value of the overall wealth and the fraction they represent may decrease slowly over a long period of time.
• Equity return = GDP growth + Inflation
• Return form precious metals and Land = less than (GDP Growth + Inflation)
• Return form Property = will be a % the value of the property value + Inflation
• Return from Debt = Inflation + a small premium