What A Long-Term View Of The Market Can Teach Investors
The curtain coming down on another year has a way of focusing the mind on how time is passing. It is also the time of year when market pundits put their forecasting hats on and share their best thoughts on what is in store for us in the year ahead.
At Vanguard we take a conservative view on forecasts, preferring long-term ranges of potential returns (see Why investors should heed, but not act on, market forecasts, 15 December).
You will see that the expectation is for lower economic growth and modest market returns. Restrained returns may well be the order of the day for quite some time yet, but patient, long-term investors should still expect to be rewarded on a real return basis.
Which raises a favorite issue – what do we mean by long-term? How long is long-term – one, three, five years, or does it not really get into long-term territory until after 10 years have ticked over?
Time frames matter a lot. Consider a university student graduating this year. They come back after a summer break to start their career journey in 2017. Their investment time frames will vary around major life goals – travel, property, family - but in superannuation terms they realistically have a time frame of 60 plus years to work with.
We don't know with any certainty what the world will look like in 2077, but we can have a high level of confidence it will be vastly different to today. We only need to take a trip back in time to see how much things can change.
A gap in the Australian investment research landscape has been the absence of long-term return data. In the US and UK it has been possible to access sharemarket return data going back 100 years for research purposes.
That gap has now been filled thanks to the research work of the Australian Centre for Financial Studies in Melbourne, a not-for-profit research centre that is part of the Monash Business School. The Australian equities database (AED) that has been compiled by ACFS research fellow John Fowler is the most comprehensive digital source of information for Australian shares for the period spanning 1926 to 1995.
At a time of year when it is customary to be looking forward and wondering what the year ahead will bring, the AED gives us a novel chance to take a trip back in time and gain some historical perspective of how Australian share investors have fared over the decades.
If you had had invested $100 in the Australian sharemarket back in 1926 today it would be worth $562,000 – an average annual return of 10.01 per cent. Naturally, inflation erodes the real value of those returns and when adjusted for inflation the average annual return drops to 5.6 per cent. At a time when forecast returns are lower than many investors are accustomed to it is interesting to look back at returns for shares over the decades. What is obvious is that investors have enjoyed something of a golden age since the dawn of 1970s through to 2006. The decade from 1976 to 1986 was the star performer – delivering investors 24.5 per cent in nominal terms and a stunning 14.4 per cent in real terms after inflation is adjusted for.
But when you look further back into the 1930s through to the 1960s you see long periods when returns are subdued with the decade 1946-56 having a negative return in real terms. So the concept of long-term returns being relatively low for quite long periods of time is not something new or novel. It is just that investors over the past 30 years have not experienced it.
The value of long-run data that resources like the AED provides is that long-term trends are more discernible. One thing that emerges from the initial analysis is that while returns have been relatively low since the global financial crisis market, volatility has moved higher. So a lower return world with higher levels of market risk is the reality facing investors as we turn the page over to a new year. The headlines for the New Year forecasting season will naturally focus on return expectations rather than the less exciting idea of managing risks within a portfolio. Which is why taking a longer term perspective and maintaining a balanced, well diversified portfolio is one New Year resolution that will pass the test of time.
Robin Bowerman is Head of Market Strategy and Communication, Vanguard Australia. As a renowned market commentator and editor Robin has spent more than two decades writing about all things investment.