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What the… ?! Why you should keep calm during volatility

After seeing bears, hedge funds and short-sellers wipe billions of hundreds of thousands of dollars and maybe more off global stock markets in recent times, and let’s not dwell on our own portfolios as well as super funds, the question is, how do you stop yourself exclaiming what the #$&%!

If that’s you, seemingly you’re at the mercy of the market elements at the moment, but we have seen some breaks in the black clouds, which ultimately are covering up the blue skies that will inevitably shine through. Well, let’s bloody well hope so.

Sorry, I had a momentary lapse of faith and I for one shouldn’t, and I will show you why.

Fortunately, long-term investors have time on their side despite the fact that our patience is being tested. Some investors can’t stand periods like this and go to cash or start playing the short-term trades — some with success and many with failure — but personally I like staying the course. Why? History is on our side. 

Long-term returns

I have used this before but it needs repeating after a week like the ones we’ve seen of late. Between 1977 and 2009, the team at Vanguard tracked $10,000, which was put into either shares and other assets based on the idea of letting the proceeds roll. That is, dividends or interest were fully reinvested so both income and capital gain was taken into account.

The study showed that US shares returned around $601,000, Aussie shares $453,000, international shares $392,000 and cash delivered $310,000.

The analysis, which included crashes in 1987, 2001-02 and 2008-09, as well as many corrections and recessions, showed that a diversified holding of assets makes sense, as they all did pretty well but shares reaped the best rewards because they’re the riskiest of the assets looked at. The results make perfect sense — the riskier assets were the most rewarding but they also taught a fantastic lesson that all wealth builders have to remember — over time the magic of compounding interest or returns will iron out the bad days, weeks or even years when you’re playing ball with stock markets. The most important take-home lesson is — don’t lose the faith!

Dot-com crash

What’s interesting is that those who held US-only or international-only shares were wealthier in 2000 than they were in 2008-09! That was the effect of the dot-com bust but they were still better off, big time, over the 32-year period.

For Australia, our $10,000 peaked in 2007 and has fallen ever since but it still ended up as $453,165 to be precise.

We actually didn’t lose much with the dot-com crash in 2000 and beyond but we copped it in the post-GFC one! 

Then and now

A thoughtful colleague pointed out that this analysis leaves out what happened over 1930-50 where markets didn’t progress much but there was not only a Depression over that time, there was also a ‘little thing’ called World War II, which would have hurt a few share prices.

On top of that we have China catching up on the Western World’s materialism and India throwing off the centuries of underdevelopment. Meanwhile Russia and Brazil are becoming world forces, which means global demand has more help than the world had in the 1930s and 1940s. 

Investment strategy

At one stage, local investors had lost around 14 per cent this calendar year to date but when I have clients calling me for reassurance I go back to the Vanguard study — I have used it plenty in recent weeks — but this is oh-so-relevant if you think you’re a long-term investor trying to get wealthy over the long-run.

Another important handholding strategy I use at these times for my clients is to remind them about what assets they hold. If your investment strategy is based on investing in quality companies that pay good dividends, or quality investment funds with managers with great track records who in turn invest in the best companies, then the rough times on markets will be eventually KO’d by the better times.

Opposite advice

On one of the recent bad days on the market I saw Jack Bogle, the man behind Vanguard, being interviewed on FOX Business in the US. He argued that in times like these it was wise to ignore that old piece of advice, which often comes from people of action — “don’t just stand there, do something”. This guy’s wisdom, which has come from his knowledge of markets over many decades, was bordering on the materially profound. He recommends the very opposite for investors in quality assets. “Stand there and do nothing!” he advises. 

Think outside the square

In my professional lifetime of interviewing and analysing the thoughts of the best people in business and finance, I have learnt that you have to think outside the square to outperform and you have to keep yourself in great company.

My wife Maureen is one of the deepest thinkers I know and when I was a young man she showed me a Robert Frost poem, which I have never forgotten. I should admit I wasn’t a poetry kind of guy but this one was unforgettable.

The poem can be summed up by these few lines: “Two roads diverged in a wood… I took the one less traveled by, and that has made all the difference.”

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 29, 2011

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