In the News

Vital To Stay The Course

Herald Sun - 11/17/2008

We are in difficult times and nerves are being shredded as so many people see the collapse of their retirement savings as the share market continues to disappoint. Markets move in cycles and the share market is traditionally a forward indicator of what has the highest expectation of occurring in the real economy over the next year or two. The market is expecting a recession or at least a severe slow down next year. It is not looking pretty and people are about at the end of their tether.

Because markets are forward looking, they fall before the physical economy falls but they also recover before the economy begins to climb out of a slump. They look across the valley and start to see the pick up in profits a year or two ahead. For this reason markets often start to rise even while the headlines and news bulletins are full of profit down grades and redundancies and corporate failures. Ironically, it is the very failure of many businesses that allows competitors to pick up market share and emerge from a downturn stronger and more vibrant than ever.

No one can ever pick the bottom of the market cycle and it always seems ‘darkest before the dawn’. It takes a great deal of courage to invest when shares are at their cheapest valuations. Rather than trying to time markets, a strategy of agreeing on a certain percentage of your portfolio always being maintained in shares, property and fixed interest and systematically rebalancing is a far superior strategy. This allows you to consistently buy more of an asset class when it is low and to reduce it when it is overweight. It takes the emotion out of the process.

It is worthwhile to look back over history and to reflect on all the other periods when the share market achieved a negative result over the course of a calendar year. In the 108 years since 1900, the Australian share market has ended the year in the red 21 times (19% of occurrences) and had a positive result in 87 of the years measured. 12 years were down by less than 10%, 5 years were down by between 10 and 20%, 3 were down between 20 and 30% and 2008 is looking like being the first year to end over 30% off its January start point since 1900 unless markets turn up sharply in the next six weeks.

The interesting point in looking at such data is to look at what happened in the years following a negative outcome on the share market. There were only 4 times that a negative year was followed by another negative year. This was in 1915, 1929, 1973 and 1981. The third and following years were positive in each of these occurrences. 1917, 1918, 1919 and 1920 went up by between 10 and 20% after the 1915-1916 down turn and in 1921 and 1922 it continued to go up by over 20% and kept rising in double digit terms until 1929.

The 1929-1930 consecutive falls were followed by a rise between 10 and 20% in 1931 and rises of between 20 and 30% per year in 1932, 1933 and 1934. In 1935 and 1936 there were also rises of over 10% pa each. Moreover,1937, 1938, 1939 and 1940 were also positive years.

The two negative years of 1973 and 1974 were followed by a return of over 60% for 1975 and a slightly positive return in 1976. In 1977 and 1978 the returns on the ASX were both between 20 and 30% and in 1979 and 1980 they were over 40% in each year.

1981 and 1982 were the most recent examples where we had two negative years in a row. These were followed up by 66.8% return in 1983, a slight negative return of minus 2.2% in 1984 but then 44% in 1985 and 52% in 1986.

The interesting point to note in all of these instances is that the economy was still in recession and the situation looked bleak when the market started each of its rallies. In 1917 we were still bogged down in a seemingly unwinnable war in Europe. In 1931 we were at the depth of the depression. 1975 was a bleak recession year where the economy was in a shambles. In 1983 we were still in a tough recession and drought and Newsweek magazine had a cover that read, ‘The death of equities’.

The key lies in staying the course and remembering Warren Buffets adage to ‘be greedy when others are fearful and fearful when others are greedy. To be transferring to cash at this stage of the market cycle after falls of over 40% seems to be a pretty illogical thing to do. Where ever the market goes in the next six months or so is not nearly as important as where it is going in the next six years.

Latest News

Downloads

$19.95 plus postage
and handling

Click here to order book.