The reasons are many. The historically superior performance of shares versus cash is simply the one that gets the most attention. Capital gains legislation in Australia provides most of the other advantages. The immediate taxation of income versus the deferred taxation of gains (as with most other countries), but most especially, the 50% discount for capital gains held over 12 months. I can’t stress that advantage enough, particularly for long-term holding as the ‘untaxed’ gains in your portfolio compound, effectively using your future taxation obligations as ‘free-leverage’.
Example – assume you are in the 38c tax bracket (between $80k & $180k in earnings). If I told you that over the next 10 years, the average interest rates on term deposits available would be 10% and the average growth in equities over the same period would be 10% (6% growth & 4% in dividends). What would you do with the $10,000 you wish to invest? For most people, the steady increase of the term deposit would be attractive, because despite both seeming to get to the same end result, the equities would probably be more lumpy, perhaps (4% / 16% / -10% / 23% / 17%) and so on. Assuming they were smooth, the end result would look like this:
There are of course other factors to consider, like capital gains & franking credits and so on. But the basic fact remains that an equity investment assumed over the long term to grow at the same rate as the equivalent cash investment will actually be considerably more valuable.
So, given that if the returns were expected to be exactly the same, equities would prove to be a substantially more lucrative investment, it is probably a more worthwhile comparison if we us their historic returns. For the 30 years from January 1 1980 to December 31 2009, the average cash rate was 7.24% (we’ll call it 7.25%) and the average return for the S&P/ASX200 (TR) was 12.47% (we’ll call it 12.5%) with approximately 4% of the growth in dividends, would look more like this:
