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Don’t run away from stocks

For all of those investors out there who are sick of the stock market and are running to cash, after looking at the top stocks for the past 20 years, I have one thing to say: “Don’t do it!”

I certainly know I have some financial planning clients who are just sick of stocks and they have so much money that they can afford to play it safe. To these people I have been saying that we’re not out of the woods yet with Europe the big encouragement for ‘hungry bears’, which have been killing our shares’ values since April.

Another group whose balances are quite low and are retired are battening down their hatches to preserve their shrinking nest eggs. I can understand why these people are running scared from the market but it doesn’t mean it’s the right thing to do from a long-term investment point of view.

But let’s just try to get away from the emotion of losing money in the short-term, daily headlines of pending doom and wealth destruction, let alone a possible Great Depression, and focus on the long-term history of shares.  

Remember this

Craig James, the chief economist at CommSec, has done a bit of homework on the top stocks for the last 20 years and has come up with some impressive numbers investors should have burnt onto their mental hard disks.

Try these:
  • Since October 1991, total returns on Aussie shares have grown by 433 per cent or 22 per cent per annum.
  • Shares have out-performed all asset classes over the past 20 years.
  • But this is the biggie from James: “While investors are currently favouring cash, it’s worth noting that if $100,000 had been invested in stocks at the end of 1990, it would have been worth $804,000 at the start of this year. The same $100,000 would have appreciated to just under $305,000”.

Shares over the long-term

Look, there are a bunch of ‘urgers’ out there who talk up shares over other asset classes and they have to be treated with suspicion. Shares are good and they can be great — short- to medium-term — but they always come back to earth with a thud.

Shares do very well over a 10-year period and you can expect, on average, that you will see three bad years but that means in one 10-year period, there could be four disappointing years but maybe only two in another period. You have to be careful with averages.

That said, the history of good quality companies bought at good prices and held for a long time has made the names of legendary investors such as Warren Buffett.

Also buried in James’ work was another lesson that shouldn’t be missed. He looked at 28 companies in the top 50 that have been listed consistently for the past 20 years. None of the 28 companies have produced negative returns over the period.

But note 10 of the 42 companies that have been consistently listed for the past 10 years have produced negative total returns over the 10-year period. And that says something about having a balanced portfolio of at least 20 stocks.

Imagine if you held those 10 companies, and it’s one argument for why some investors simply buy index funds or ETFs that are based on the S&P/ASX 200 index. 

Cash vs. shares

Right now, consumers surveyed by the Westpac/Melbourne Institute think the bank is the safest place for their money and the reading is at a 37-year high and they’re right but it might not be the best place for their long-term wealth.

James points out that over the past 20 years the All Ords Accumulation index has risen by over 433 per cent or around 22 per cent a year. The S&P/ASX 50 total return was 453 per cent or 23 per cent per year.

The Accumulation Index includes the impact of dividends of the total return, which, of course, includes capital gain. Dividends constitute at least 50 per cent of the total return of shares, which in various studies shows that over a 10-year period the per annum return is around 10 to 12 per cent. So dividends are worth about five to six per cent and that’s why I like shares and especially those that have histories of paying decent dividends. 

Top shares

For those who want to know the top shares and their per annum returns, here they are:

  1. Fortescue Metals Group (12,431.2 per cent)
  2. Sonic Healthcare (887.7 per cent)
  3. Leighton Holdings (175.8 per cent)
  4. Wesfarmers (107.7 per cent)
  5. CBA (105 per cent)
  6. Iluka Resources (83.2 per cent)
  7. Origin Energy (74.4 per cent)
  8. Woodside Petroleum (71.3 per cent)
  9. ANZ (69.5 per cent)
  10. QBE (64.3 per cent)
  11. Orica (56.8 per cent)
  12. Rio Tinto (51.9 per cent)
  13. Oil Search (50.5 per cent)
  14. BHP-Billiton (48.2 per cent)
  15. Santos (45.8 per cent)
  16. NAB (41 per cent)
  17. Newcrest Mining (37.4 per cent)
  18. Coca Cola Amatil (33.2 per cent)
  19. Foster’s (24.4 per cent)
  20. Stockland (23.9 per cent)
  21. Suncorp-Metway (20.4 per cent)
  22. News Corp (18.6 per cent)
  23. Amcor (16.7 per cent)
  24. Brambles (11.1 per cent)
  25. Lend Lease (5.2 per cent)
  26. GPT (4.6 per cent)
  27. Alumina (1.3 per cent).

Some of these companies have lost their mojo but others are still at the core of building a great portfolio and after looking at these returns I think there’s a pretty decent case for going long quality stocks that pay dividends for the long-term. Don’t you?

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

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: Wednesday, October 19, 2011

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