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In defence of shares

In an attempt to convince investors and readers that what we are seeing now on stock markets is all part of the game of taking the thrill-seeker’s path to greater wealth, let me mount a defence for hitching your wealth barrow to those skittish, nerve-creating things called stocks.

Stocks or shares were the common ground that linked a whole lot of normal people to something called the Global Financial Crisis, which brought with it a global recession as well as a stock market crash. The latter wiped around 50 per cent off the value of someone’s portfolio if their collection of shares mirrored the S&P/ASX 200 index.

Looking back to look forward

Let’s go back in time before making some conclusions about shares.

The stock market peaked on 29 October 2007 at 6792.1 and then dived to 3145.5 by 6 March 2009. That was a 53 per cent fall and means the market must come back a tick over 100 per cent to bring your shares back to where you were, if your portfolio matches the index pretty closely.

However, if had bought into stocks on 29 October 2001 when the index was 3256.2 you would have made 108 per cent on your investments by 29 October 2007! And you would have kept it all if you had bailed out on that fateful day but that is easier said than done.

If you had started on 29 October and had stayed the course until 2 August this year where the index has gone from 3256.2 to 4433.6 you would have made on the share price change alone 36 per cent. These are two low-point levels for the stock market and so it does build a case for stocks. But we have left something out that always has to be remembered — half of your returns on stocks come from dividends.

That means there could have been 10 years of dividend returns of around four per cent or even more over that period. So using the simplest of mathematical thinking, being in stocks over a decade which has had two crashes — the Dotcom bust and the GFC stock market wipe out — an investor with a portfolio that closely matches the index could have pocketed a bit more than seven per cent a year. That adds the share price gain to the dividend returns.

Over that time, anyone shooting for the best return in fixed deposits would have been damn lucky to average six per cent and probably got closer to four to five per cent and out of that they would have been taxed as well which could have taken another one per cent off the final return.

Sure shares are taxed to but if someone decided to buy their shares inside a self-managed super fund they could have reduced the tax paid and even via franking credits could have done their trading and wealth building enjoying tax refunds! 

Scary yes, but worth it

But I digress from the main point of my argument. My basic proposition is that sure shares are scary but when they mixed win with a balanced portfolio of other assets they can be a powerful foundation for building up wealth. You just have to get used to the rollercoaster aspect of shares.

A few years back I asked Macquarie’s property guy Rob Cornish to do a comparison of returns from property and shares. His team came up with the interesting view that quality shares and quality property had returns averaging around nine to 11 per cent over five-, 10-, 15- and 20-year periods. Sometimes property would beat shares and vice versa and I took from that the general view that you can expect around a 10 per cent return from quality assets but it generally implies that you are a buy-and-hold type of guy.

That can be easier for property players as we tend to be in for the long run with real estate. On shares, many have a slap hazard, ad hoc approach to buying and selling stocks and that chaos can give surprise windfalls but generally creates all-too-regular losses. 

Playing it safe

Now I am not arguing that you can’t beat the index using great guidance or really competent playing of the market but it does take great judgment. And that’s why I like amateurs adopting a consistent approach to buying quality shares that have a good history of paying dividends.

They should be put into a portfolio of other great assets and hopefully you can buy them when their prices are low. The best property buys I have made in my years of investing have always been when the market was a bit spooked.

I hate high interest rates when I am repaying a loan but love them when I am trying to buy assets as it invariably gives me great assets at low prices.

The goal for every investor is to have a great range of quality assets and understand that prices rise and fall. If you’re retired, your job is to have a good supply of cash funds for when times are crook on stock markets but when things turn around you are nicely exposed to the run up of the market.

These are trying times for all investors and mostly for retirees but the drought will break and stocks will eventually head up. The trick is to be diversified with quality assets, have a plan you stick to and have faith in the history of what stocks can do.

I had a viewer who had his $1-million nest egg in five great stocks and at the lowest point of the GFC crash he had seen his portfolio drop to $300,000! He asked me in February 2009 if he should go to cash and I advised him that he had to beware the market bounce, which eventually came in March 2009. If he had gone to cash he would have got seven per cent at best and missed out on the 40 per cent gain that has happened in the 28 months since.

One last thought — what about the person who got into stocks 28 months ago for the first time and now has made 40 per cent!

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: Monday, August 08, 2011

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