Call us on 1300 794 893

The Experts

How to build wealth when markets crash

Bookmark and Share

It’s times like these (when stock markets are hogging the headlines, scarily talking about billions of dollars being wiped off the share market) that money-maker haters come out of the woodwork to slam anyone who is a supporter of stocks to make money. But history has taught me that these people are dopes. And they can be the worst kind of dopes — well-educated ones.

I must confess I was once like that. When I taught economics to some of the smartest young people at Sydney Grammar School and later at the University of New South Wales, I specialised in the economy and how it worked. They call it economics and it’s a wonderful way to understand the world but it can be a little too theoretical.

I was dragged out of my lovely world of a university job teaching micro- and macroeconomics by the October 1987 stock market crash.

I’d been writing a economics column for the Daily Telegraph for two years and helping Triple M’s Walkley Award-winning, national news director, David White, put together a documentary called “Are we living on Borrowed Time?”

Realising my need to understand the business world that had a very big impact on the economy, I’d started reading the Australian Financial Review each day. Luckily I did, as the October 19 crash of the stock market catapulted me into Australia’s media as a market expert and I’ve been there ever since.

Thank you, Whitey!

But along the way I realised that I not only had to talk about and explain business and the stock market, I actually had to walk the talk, which led to my exploits with stocks. And that led to me establishing my own financial planning business to service those who liked what I said and did.

And while nothing is certain in life, there are historical lessons that can help you build wealth better than those who refuse to learn from the revelations have gone before us when it comes to wealth-building.

This chart (and ones like it) taught me about the power of the stock market.

This is the S&P/ASX 200 since 1 November 1992. It was at 1456 and is now at 6768. That would have given you a 364% total gain or around 13.5% per annum but that’s the simple capital gain. A portfolio that matches the S&P/ASX 200 has returned on average over 4% in dividends. So let’s say the gain is 17%, which would be more if you add in franking credits.

But that’s simple mathematics. History says our Index returns 10% per annum on average over a 10-year period. Of course, sometimes the decade will do better or worse but it looks like half the gain turns out to be dividends. These little bleeders are unbelievably reliable — even in recessions and market crashes. Sure, dividends fall but nothing like stock prices.

If you need more proof over a longer time period, have a look at this one since 1880!

The trend line shows you what stocks offer. It also shows there can be bad times for stock prices. But if you invest for income (dividends), you can live with the volatility that will eventually head up over time by making sure you have stocks that pay great dividends.

People lose from stocks because:

• They ‘punt’ rather than invest.

• They shoot for big returns fast so they take big risks.

• They don’t have 15-20 stocks to reduce the chances to be KO’d by a dumb government decision or silly CEO.

• While it’s great to get into the market at the low and ride it higher, history shows time in the market is more rewarding than trying to time the market.

• They don’t look for quality businesses run by quality management, which are not vulnerable to crazy curve balls.

What I like about stocks and the ASX 200 is that it gives me a chance to invest in the top 200 companies in Australia. I like to proudly put my money where my heart and my head say represents a good way to build wealth.

But if this Trump-China trade war turns out to be worse than I expect, what will I do?

First, I won’t panic. I know my stocks will pay me nice dividends. Second, I know my capital will come back over time, as the charts above show. Third, I will have a chance to buy great companies at silly prices because big stock sell offs do that.

During the GFC, CBA got down to $27 and if you’d bought those stocks then, you would’ve seen a capital gain of about 200% in 11 years and your dividend-yield would be 16% before franking credits. A retiree paying no tax could have an 18% yield, thanks to franking credits!

I don’t think you’d find too many properties that would be delivering that over the past 11 years and it comes without a tenant!

But what about that old financial warning that history is not necessarily a guide to future performance? That’s true but that’s a good warning when looking at financial products that have looked good over a few years. I reckon the stock chart since 1880 above with its trend line tells you that if you give the right stocks portfolio enough time, it will deliver. Sometimes it can be smart to trust history.

Could anything go wrong to undermine the calibre of my money-making lesson? Yep, a real Great Depression. But if that happened, it wouldn’t only be stock players who’d be taken to the cleaners. Anyone with a home loan and no job would be on the dole queue!

Only a Great Depression would make stock market dopes look very smart. Let’s not go there.

(If you’re interested in the money secrets the wealthy have learnt to help them get richer, have a look at my new book called Join the Rich Club. Getting richer not only should help you, it will give you a chance to help the people you care about.)

If you liked this article you'll love the Switzer Report, our newsletter and website for trustees of self-managed super funds. Click here for a FREE trial and to hear more of Peter’s expert commentary and advice.

Follow Peter Switzer on Twitter
Follow us on Facebook

Published: Wednesday, August 07, 2019


New on Switzer

blog comments powered by Disqus
Pixel_admin_thumb_300x300 Pixel_admin_thumb_300x300