Investors and their financial planners have now endured over 5 years of turmoil since the onset of the Global Financial Crisis. The extended nature of this slump in markets of all types has sapped the energy, patience and temper of everyone connected to the world of money. As i have a number of times before, i would again ask that you, dear friend, take a moment to step away from all the predicting, guessing and gambling and take a look at the wider view.
Australian Sharemarket Long Term View
Most investors can repeat the mantra that the sharemarket is a place best suited to long term investors. It’s just that most of us cannot really state just how long “long term” is in 60 words or less. So here’s a look at one of the primary long term “growth” oriented investment areas…
We’ll look at the Australian All Ordinaries Index but we’ll use the “accumulation” version, which makes the assumption that you reinvest all dividends that you would receive back into shares as soon as you receive them. At the moment, the return showing on your annual super statement for anyone heavily invested into Australian shares would show a markedly different result, depending on which day your figures are prepared. That makes it incredibly misleading for people, as many will look at their statement and start to make assumptions about returns and results based on statements that are already out of date when they are posted!
The five year return for the All Ordinaries Accumulation Index as of the 22nd August 2012 has been 11.3% plus franking credits. However, anyone looking at the same figure on the 30th June this year would have been looking at an annual figure of minus 7.4%… i think you can begin to see why i’m writing this post… It’s very hard to see the wider perspective when you are watching moves of that size occur in a very short time period.
Some funds are quick and some are slow in administration issues, so it is quite likely that a lot of people are only now receiving their end-of-financial-year statements for their super funds.
Some people will look at the returns (or lack of) and start to draw long term conclusions from short term results. Some will look at fees and decide that they are totally inappropriate (i won’t argue here that they are or are not – i’m just asking that everyone take the time to make sure any conclusions being jumped to, are solid and based on fact, not opinion or worry or advice from the bloke next door).
So let’s look at just the one part of many people’s super account (i know, not everyone is in shares in their super – but the majority are, even if they don’t think that they are) and see how the huge monthly shifts of -7.4% to +11.3% pan out over a longer time period…
This chart shows the longer term view of investing into a broad basket of shares. An eternally negative person would point to this chart and suggest that returns are headed “lower” and point to the 1.84% drop in 10 year returns as being indicative of a down trend. i won’t argue whether it is or it isn’t, i’m just going to point to the long term nominal return shown in the chart, and suggest that for all of the hullaballoo, things haven’t really changed all that much.
The returns shown in this chart are not really such a bad outcome in the scheme of things. However, this does assume that all dividends are reinvested, which not everyone is able or willing to do. It will generally happen in the share option of a super fund. These sort of returns are not out of the ordinary or too far away from what you would expect to be the case. The RBA calculator for inflation (found here) suggests a 2.7% pa rate from 1992 to 2011. The www.rba.gov.au website suggests inflation last year was 1.2% so 2.7% can be kept as our benchmark. This means that a sharemarket investor receiving a return that reflected the All Ordinaries Index plus dividends, would have earned a real (after inflation) return of 6.53%. Again, that’s not a bad figure in the scheme of things.
You then have the issue of costs, which i won’t cover in any detail here, as it has been suggested that some of my posts are already just a tad too long…. There is a post on costs and alternatives coming up a bit later, so we can cover that then.
My point here isn’t to suggest that you should sell the house, pawn the contents and rent your children to a local coal mine just to invest into shares. i’m simply pointing out some long term trends that continue to do what they have done for many, many years – regardless of what some internet spruiker (am i one of those..?) may suggest. Naturally, this long term return comes with a lot of ugly surprises – substantial drops for one crisis or another. And yet the measurements shown above are inclusive of some very large crashes in share prices, including the “dot.com” bubble, the 1994 interest rate disaster, and right near the end – the Global Financial Crisis. That would tend to indicate a fairly resilient market.
Contrary view : ‘There are statistics and then there are damn statistics, and then there are lies. In a “real world” example of the above chart, it would be the case that most people would NOT have simply deposited a single amount of money 20 (or even 10) years ago and then left it there to accumulate. Most people would be contributing to their account or making further purchases over time. There is a “weight of money” measure that would suggest returns could be different from the chart, as a lot of people can save more money as they get older, which means that the bulk of their money would have been invested in the last 5 or 7 years – in which case the total return achieved would look worse than the full 10 or 20 year figures. This is a massive cause of misunderstanding, and frankly super funds are doing NOTHING to address member understanding of its impact. Calming, paternal statements of “it’ll be alright, leave it with us” don’t help increase knowledge or understanding.
There are arguments currently raging in financial circles that suggest shares make up too large a part of the “average” investor portfolio. That may or may not be the case but care should be taken in making assumptions for the next 20 years on the basis of returns for the last 5 or even 10.
For the almost-knowledgeable, please do not point to 20 year bond vs share charts to suggest that the outperformance even occurs over longer time frames… Any sensible look at this idea considers rolling periods over extended time frames, and anyone who suggests to me that near-zero interest rate environments will continue to be the case in 10 years time had best have a strong argument ready as to why they should not be selling their home right now and seeking alternatives…
The asset allocation problems facing professional managers today are immense but let’s hope that they do not listen too hard to the doomsayers or the average person may find their average fund return impacted in rather non-average ways over the coming 20 years.
Please remember the Great Disclaimer of this site – nothing written anywhere on this site is to be taken as personal advice. i can have no idea of who is reading this post or their financial position, objectives, risk profile or attitude to investments or financial planners. Therefore, the things i write about are of necessity very broad, and include generalisations that would be wrong for some people – and i don’t know who those people are! There, you have been warned. Personal advice can only be provided by an appropriately qualified person, holding an appropriate licence, who has undertaken appropriate investigation into your personal situation, wants, needs and attitudes and then spent the appropriate time investigating those in light of current legislative, economic, and market data.
That’s the big disclaimer. Just as important is the point that my notes above relate to only one section of the available investment universe, and only covers a highly limited range of data points. Now that “markets” are beginning to see the light at the end of the tunnel of the GFC turmoil, discussion is again turning to the “best” mix of assets for building long term returns above inflation. It’s a geeky but highly important topic, and one that i will be covering in a great many posts over the next year. i hope you find them helpful in understanding the world of financial planning and the world of money.