Comparing apples and oranges

27 February 2023 – Here at Human Financial we’re always asking ourselves, “Which is the best asset mix to achieve our investment outcomes?”

As legendary investor Warren Buffet says, "Price is what you pay, value is what you get." But comparing the value of different assets can be a complicated business.

We use a variety of methodologies, but the simplest way to compare apples and oranges is to look at the income they generate. This approach isn’t perfect, as it ignores other characteristics such as volatility and liquidity risks; however, it does provide a reference point of relative valuation. It’s also the way most people compare different investments or assets in their everyday life: what yield can I get?

Equity Risk Premium

To compare equities and government bonds, for example, a commonly used metric is the equity risk premium (ERP), which provides a single measure that compares the relative attractiveness of equities to government bonds across time. The formula is:


Figure 1 shows the ERP for the S&P 500. ERP is regime dependent, i.e., it is not static, and its movements are driven by macro-economic factors. Having said that, it’s clear that US equities are currently at their most expensive levels since before the GFC. Despite the selloff in 2022, buying riskier equity assets currently yields you less than 2% more than the safe-haven asset of US treasuries.

This relative unattractiveness of equities is partly due to US 10y treasuries yielding close to 4%. Although this yield isn’t particularly appealing historically speaking, it’s at a level that investors could only have dreamt of during the last 15-odd years.

While our investment process doesn’t hinge on a single metric, the ERP does clearly highlight the need for caution within investment portfolios. Even after a poor performance in 2022 there may be more trouble for equities ahead.


This website is prepared by Human Financial Pty Limited (ABN 14 615 610 305) and its subsidiary CFML (ABN 99 067 544 549) (together, Human Financial). CFML holds an Australian financial services licence (AFSL 227677) as the responsible entity of managed investment schemes and the operator of an investor directed portfolio service. Human Financial recently completed the acquisition of ClearView’s investment management business, ClearView Financial Management Limited (CFML).

This website contains general information only and has been prepared without taking account of your objectives, financial situation or needs. You should obtain licensed financial advice tailored to you, and consider the relevant product disclosure statement (PDS), before making a decision. The target market for each product is described in the relevant target market determination (TMD).

All investment products have an element of risk. Please consider the risks involved before making an investment decision.

Past performance information is not a reliable indicator of future performance.

Read our Privacy Policy for information on how we handle your personal information.

© 2024 Human Financial