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The best reason to stick to shares

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by Peter Switzer

A great article in the AFR over the weekend started from a premise that underlines how little most of us understand about investment. The simple rule of investment is if you don’t want risk, play the term deposit game and if you don’t have much money, don’t plan to be a big spender or get a part-time job.

The article started proposing that someone who put $100,000 in super in mid-2001 saw his nest egg grow to $170,000 by late 2007 and then drop to $150,000 four years later – that’s a total of 10 years.

So for 10 years the return on $100,000 was $50,000, which was described in the article as “hardly the stuff of golden retirement dreams".

However, Morningstar makes the point that Aussie shares have returned 10 per cent a year over the past 25 years while cash returned 7.4 per cent.

Robin Bowerman of Vanguard Investments says the median return of our shares from 1950 to 2010 was 12.9 per cent and the worst 20 years to February 2009 still came in with an 8.4 per cent result!

Exposure to shares?

I think Jeremy Cooper of the Cooper Review is running around generalising saying “the moment you retire you just can’t afford to wear the risk of loss because that is your nest egg you’ve got.”

That could be good advice to some people but poor advice to others.

If you play it too cautious, you could run out of money anyway and end up on a government pension.

The longer you are likely to live, the more likely it is that you need to have some exposure to shares but the trouble is that we’re living through a tough time for markets.

Let’s go back to the first example. The $100,000 to $170,000 in six years was a return of around seven to eight per cent but then came along the worst market crash since the Great Depression and the return drops to around four per cent, which is not too bad given the circumstances and is around what you would expect from term deposits over that period with no real risk.

And that’s my point. With shares — provided they are quality ones that pay good dividends — you hover between what you get in cash or term deposits and the chance for the periods where the returns are 10 to 12 per cent.

Final point

This is my final telling point. We started with an assumption that someone started with $100,000 in mid-2001, but if that came from previous investments, which were largely cash, that starting amount might have been $70,000!

I hate watching markets day-to-day, but many of my followers are short-term investors and that’s why I cover what is happening and what might happen. However, my financial planning clients are long-term investors and that’s why I like to remind them of the facts with spooky stock markets and when my media mates report the bad news.

By the way, the argument for being diversified — say holding shares, cash and property — has been made even stronger by what we have seen in recent times on the stock market but history continually tells us that it is foolish to dump stocks for the long-term, just because they disappoint in the short-term.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Monday, September 26, 2011

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