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Scary times like these and I earn my money!

Peter Switzer
12 February 2016

By Peter Switzer

Remember this — it’s at times like these that I really earn my money. This is when I completely throw off my media man tag and entrench myself in what I really am in the investment world — an adviser/educator.

I started a new show this week with my Sky News colleague, Janine Perrett, whose rants appear on www.switzer.com.au. And yes we’ve argued all week about markets and whether this is a buying opportunity or not but at the core I knew my main message for those watching and wondering what they should do, is have faith in stocks in the long run and don’t be too sidetracked by the falling stock markets and negative press.

We all love stock markets rising and unless you are a hedge fund manager or short-seller what we’re copping now is unnerving. It’s even more annoying when people like AMP’s Shane Oliver, Fed Chair Janet Yellen, the World Bank, the IMF and most economists out there don’t expect a recession, but the market is saying it does not agree!

Of course the good guys could be wrong — it has happened before but the real question for me as a financial adviser/educator is how do you react?

During the GFC crash year of 2008 and rolling into 2009 a lot of retirees who had lost a lot of their super in stocks ran to the safety of term deposits but at least there were some good rates around in 2008. However, if they were locked in because of understandable fear they missed the bounce in the stock market in 2009, which was over 30% plus dividends.

This is what term deposits have done since 1971 but you will notice since 2008 they’ve been mainly 4% or less! Someone who might have lost 30-50% of their stock portfolio in the GFC crash, then might have averaged 4% or less in term deposits because they were too scared by the market slump.

Yesterday in my column I showed what happened if you returned to stocks in early 2009 and I will reproduce it here for educational reasons.

And in case you’re a whinger, who wants markets to always go up, remember this about our stock market. The GFC closing low was 3145.50. We’re now at 4775.7. That’s a 51% rise over seven years (from March 2009 until now). Now let’s add in say a 5% return for dividends each year. That’s 35%, giving a total of 86%. Let’s also throw in 1% for franking credits each year, giving us a gain of 7% over that seven-year period. The grand total for anyone, who had a portfolio as good as the index plus dividends, is 93% (or a 13.2% rise each year).

One reader accused me of cherry picking my figures but I was trying to show what it cost you if you were too scared by the GFC crash, all of the media hype and the short-term thinking that can dominate when markets get rough, like now.

If you can’t take the markets’ ups and downs you should try property where you don’t see the price change daily. You can lose there temporarily and it can be for a number of years as the property owners on the Gold Coast and in Sydney’s Palm Beach found post-GFC.

There were huge double-figure losses there for some property owners, especially if they bought in early 2007 using their big gains from the stock market.

By the way, the overall Sydney property market had gone nowhere for about 10 years up to 2012 as the chart below shows: 

So, for ten years Sydney house prices rose at 2.5%, which was around the inflation rate. They went nowhere — on average — for 10 years! 

This week one newspaper said our stocks have done nothing for a decade and therefore you’d made nothing at out of stocks. However, there are two faults with that analysis.

First, the writer left out dividends! Half of all earnings from shares are dividends and if you have a portfolio that delivers 5% in dividends plus franking credits of say 1%, to be conservative, then for the 10 years from 2006 you should have pocketed 60% of income from shares, which is miles better than term deposits.

Second, by selecting 2006, he cherry-picked that date to write a story of investing in stocks has been useless when it clearly has not been.

In contrast what if he selected 2004? This was a few years after the dotcom bust and let’s say an investor came to the market as the trend for stocks was starting to look good and they remained good until late 2007. 

In  January 2004 the S&P/ASX 200 index was at 3,300.7 and so if you’d entered then your gain would have been 1,521 points over 12 years which is 46% or nearly 4% a year plus 6% from dividends and franking credits which is 10% per annum. 

This is what stocks have historically delivered. Matt Kidman in his book Bulls Bears and a Croupier showed that a mathematician looked at every 10 year period for stocks over a hundred years and this 10% approximate return happened in just about all 10-year periods.

I’m saying 1900-1909, 1901-1910, 1902-1911, etc. Yep, in just about all of them 10% showed up and half of it turns out to be dividends!

I’m not sure how long this negativity on stock markets will persist but it is my job to tell you that provided you have great companies that pay dividends you will, over time, be OK and eventually the stocks you hold will start their upward march.

I will bring in this chart again as it reinforces the benefit of stocks over the long run and those words “over the long run” need to be remembered and be used to help you cope with the scary short-run.

 

 

I selected 2009 as it was the year after the crash of 2008, but even then it shows a portfolio of stocks as good as the S&P/ASX 200 index with dividends reinvested between 1970 and 2006 saw $10,000 become $453,165. If I had let it go to 2015 it would have been more and if I’d taken it to now it would have been less than 2015 but more than the $453,165 of 2009.

No matter what numbers I “cherry pick”, as long as I give myself at least 10 years stocks will deliver.

The point is that if you look at that blue line for Oz shares you see crashes and corrections but eventually the uptrend happens and persists and then the magic of compound interest kicks in to be wealth. A Great Depression could knock around the comeback for a longer period but history shows most good companies prevail.

As an investor I am in both property and shares. I have had a great three years with my Sydney properties but I expect a slower period coming up, however, like my shares’ dividends, the rents will keep on coming in.

During scary market times people like me should tell you to do nothing if your portfolio is a good one. You could buy stocks taking a lesson from Warren Buffett who tells us to be “greedy when others are fearful” or you could go to cash and wait for the uptrend to reassert itself and ride that up again but timing can be really tricky as I showed yesterday.

The most important point I can make this morning is not to panic. Follow the thin blue line in the chart above and have faith — history is on our side.

P.S. I was up at 4 am this morning to see how Janet Yellen was doing talking to US politicians on Capitol Hill and the Dow was down about 350 points! European stock markets were down on global growth fears, related bank exposures and the US stock market played follow the leader as oil prices fell and the safe haven gold spiked in price. The Fed Chair did nothing wrong and confirmed my view that central banks disagree with the market on growth concerns but she was not able to lead the markets up. Charisma is not her strong suit, so it might be up to the European Central Bank’s Mario Draghi. Can Super Mario come to our rescue? I damn well hope so!

P.S.S. At 7 am talk of an OPEC deal turned around sentiment — funny that! — and the Dow was down 272 points. 

 

 

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