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.
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
15 December 2016
www.vanguardinvestments.com.au
Latest Newsletters
Hot Issues
- Aged care report goes to the heart of Australia’s tax debate
- Removed super no longer protected from creditors: court
- ATO investigating 16.5k SMSFs over valuation compliance
- The 2025 Financial Year Tax & Super Changes You Need to Know!
- Investment and economic outlook, March 2024
- The compounding benefits from reinvesting dividends
- Three things to consider when switching your super
- Oldest Buildings in the World.
- Illegal access nets $637 million
- Trustee decisions are at their own discretion: expert
- Regular reviews and safekeeping of documents vital: expert
- Latest stats back up research into SMSF longevity and returns: educator
- Investment and economic outlook, February 2024
- Planning financially for a career break
- Could your SMSF do with more diversification?
- Countries producing the most solar power by gigawatt hours
- Labor tweaks stage 3 tax cuts to make room for ‘middle Australia’
- Quarterly reporting regime means communication now paramount: expert
- Plan now to take advantage of 5-year carry forward rule: expert
- Why investors are firmly focused on interest rates
- Super literacy low for cash-strapped
- Four timeless principles for investing success
- Investment and economic outlook, January 2024
- Wheat Production by Country
- Time to start planning for stage 3 tax cuts: technical manager
- Millions of Australians lose by leaving savings in default MySuper funds
- Vanguard economic and market outlook for 2024: A return to sound money
- An investment year of ups and downs
Article archive
- January - March 2024
- October - December 2023
- July - September 2023
- April - June 2023
- January - March 2023
- October - December 2022
- July - September 2022
- April - June 2022
- January - March 2022
- October - December 2021
- July - September 2021
- April - June 2021
- January - March 2021
- October - December 2020
- July - September 2020
- April - June 2020
- January - March 2020
- October - December 2019
- July - September 2019
- April - June 2019
- January - March 2019
- October - December 2018
- July - September 2018
- April - June 2018
- January - March 2018
- October - December 2017
- July - September 2017
- April - June 2017
- January - March 2017
- October - December 2016
- July - September 2016
- April - June 2016
- January - March 2016
- October - December 2015
- July - September 2015
- April - June 2015
January - March 2017 archive
- Calls for calm over pending CGT amendments
- Almost the world's best for retirees
- ATO reports on top contravention areas for SMSFs
- What recent retirees can teach pre-retirees
- Deloitte points to ‘red flag’ SMSF patterns
- Save early, save often
- Government pushes forward with multinational tax measures
- Jump-start your retirement savings
- Government urged to rectify ‘legislative shortcoming’ with CGT relief
- Some financial terms explained
- Areas of key focus for SMSFs in 2017.
- Powerful Superannuation modelling tools available on our site.
- Your New Year reading: beyond John Grisham
- What a long-term view of the market can teach investors
- CGT confusion seeing unnecessary sell-offs
- ‘Devastating’ property investments hitting SMSFs
- Asset valuation crackdown imminent for SMSFs
- New Year (investment) resolutions
- Trump stimulus to boost global markets
- Female advice customers on the rise
- Retirement costs outpace rise in CPI
- ATO set to scrutinise CGT relief claims