Your task today is to spend a little bit of time becoming a little more familiar with the world of sharemarkets – and don’t worry, it is quick and easy and far more interesting than reading some of my more verbose postings…
Many people fear the sharemarket as a place of enormous uncertainty. Even long standing investors can take the approach that any investment into shares is “risky”. It really is a matter of relativity, as recent events have shown us that all investments can be risky. We have witnessed situations in which global institutions considered cash in a bank account so insecure that they have PAID the United States government interest to hold their cash overnight. So now is a good time to challenge long-held beliefs and reassess our attitudes to risks and returns.
Vanguard have helped the average investor to come to grips with this potentially confusing area of money by releasing an interactive chart on their website. This chart shows the returns from various investments locally and around the world from 1970 to 2009. You’d have to consider that time frame reasonably long-term, as it is pretty close to a full working lifetime for the average little vegemite.
Even the “sophisticated investor” will find tinkering with this chart intriguing. The actual figures are of course, public domain and can be obtained from any number of sites. What i like about the Vanguard chart though, is that in the one spot you have a quick, visual way of looking at what has happened to investments in Australian shares, International shares, United States shares, Australian fixed income bonds, International fixed income investments, Property and Cash. You can look at the returns individually or collectively. You can look at the best returns in that 39 year period or the worst returns. You can look at the returns from each of these areas in a given year and compare that to the average return that would have been achieved over the entire period.
Even more intriguing is the ability to hold your mouse cursor over the Yearly timeline at the bottom of the graph and you are presented with a selection of the bigger political or economic events that happened in that year.
For relativity nerds such as myself, there is an element of fascination involved when looking at the sharemarket returns in 1974 of minus 27.3% (cash was 7.1% and Australian fixed interest bonds came in at minus 8.8%) and comparing that to the inflation rate of 19.8%. That would have to put the terror of a financial meltdown into anybody and yet the chart tells us the 1975 returns for the sharemarket were positive at 8.4% (International shares were up 24.5% in that year) and in 1976 Australian shares recorded 32.2% – even while inflation hit 22.4% (it peaked at 23.3% in 1977!).
i am not going to draw any particular conclusions from all of this data. The fun for you will be to look through it and come up with thoughts and ideas that you’d like to find out more on. If you don’t find that kind of thing fun then consider it an excerise in understanding money that you really should undertake at some stage in your life – why not now? Alternatively, visit a bunch of experts in the field – financial advisors, Accountants with long memories, and other citizens of the financial world, and seek their input on the issues.
Of course, there are always warnings. You know, don’t put your hand in a flame, shattered glass can cut sensitive skin and all those kinds… but really, the key warning is to always look at stuff like the chart as being data and not information. It only becomes information when you are able to coherently and accurately assess helpful stuff from it, and that is not as simple as it seems. You see, the chart is looking at “indexes”, which are broad market measures of the “average”. For most investors, the average was not available way back in the ’70’s. It is only in more recent times that investors have been able to invest into the average and therefore reduce the risk that they will select the wrong investments in a particular marketplace. Another risk is to assume that obvious correlations in the short term actually mean anything when transferred to different terms. The old warning that past returns do not reflect future returns always holds true.
So, assuming i haven’t been a killjoy to any fun you may have potentially had with the graph, how about grabbing yourself an espresso and spending a few minutes updating yourself on the world of money? If you want a pretty picture of the Australian sharemarket as measured by the All Ordinaries Index, i’ve set out a few below. Enjoy!
Again, we won’t draw any conclusions today… we’ll just ponder the pictures and what they may or may not be telling us.