Market Update – August 2017
Property & Share Update
Once a year, a very important piece of research becomes available. It is the Long-Term Investment Report. The latest report has just been released and it tracks the long-term performance of various asset classes over the last 20 years.
This long-term emphasis is why the report is so useful. Investors simply must take a long term timeframe if they want to do well in investment markets. And long term means at least 10 years.
Over the last 10 years, the absolute best investment class has been residential investment property. The average gross return has been around 8% per year – well in advance of the average inflation rate of just 2.5%. This is actually a little bit down from the 20 year average return of 10.3% per year.
Of course, as we have said before, Australia does not have a single residential property market. Take Perth, for example. Many people nominate Perth as the most remote city of its size in the world, given its distance from other Australian cities. In fact, Perth is closer to Jakarta than it is to Sydney. And the relative performance of the property markets in Perth and Sydney in recent years demonstrates that they are not part of the same property market. In case you haven’t noticed, Sydney prices have almost doubled in the last five years, while Perth prices have at best stayed, but in many cases have fallen.
Nevertheless, the fact that an average residential investment property has outperformed the other asset classes and produced a return much in advance of the inflation rate is clear.
One of the truisms of investing is that it does not make any sense to chase past returns. Just because something rose in value last year does not mean it will rise again this year. And, of course, the key to really successful investing is to buy things that have recently fallen in value – provided that they are about to rise again.
Nowhere is this more evident than in the share market results reported by ASX/Russell. For the 10 years to December 2016, the average gross return was only 4.3%. This is only slightly above inflation and well behind the performance in the bond market. However, the relatively poor 10-year performance was due largely to 3 bad periods of roughly 12 months’ duration – 2007/8, 2011 and 2015. If you bought shares before those bad periods, then you did badly. But if you bought them during or just after those bad periods, you did quite well.
Once again, the problem is that nobody knows what is about to happen in the share market. The market peaked in October 2007 with the ASX 200 trading at about 6800 points. In March 2009, just 18 months later, the market bottomed out at 3145 points. This was a fall of almost 54% over an incredibly short period. Then, by March 2010, the market had recovered to 4900 points a rise of 56% in an even shorter period. So, October 2007 was a horrible time to buy. March 2009 was a great time to buy.
The problem is, very few people knew these things at the time. As the prices show, very few people were selling in October 2007 and buying in March 2009. But hindsight tells us that that is exactly what people should have been doing.
The power of long-term results is that it encourages us to look beyond shorter term fluctuations. The ASX Russell report tells us that even though the market fell by more than 50% in the first year of the 10-year period to December 2016, long-term investors still made money in the sharemarket. This would be especially the case if investors did not invest all of their money at a single point of time. Spreading out the purchasing of investment assets such as shares manages a special type of risk known as ‘timing risk.’ As the name suggests, timing risk is the risk that you will buy when prices are about to fall and/or sell when prices are about to rise. As the fluctuations in the stock market over the last 10 years have shown, it is quite possible to buy at the wrong time and sell at the wrong time – in fact, many people did.
When you divide an investment amount into smaller portions, and invest those portions at different points in time, you reduce the chance that you will buy all of your investment assets at a time when prices are high and about to fall. And you can do the same thing when you sell: making a series of smaller sales reduces the chance that you are selling when prices are temporarily low.
In investing, as in life in general, controlling the controllables is as much as you can do. One of the few things you can control in share market investing is the time at which you buy and sell.
So, if you are contemplating share-based investment, make sure you talk to us about timing risk and let us show you how you can exert some control over what is actually the most important decision a share market investor can make.