The thing about financial markets is that the further into the future you look, the more predictable things become, writes Mark Lister. Photo / 123rf
Opinion
August is “Money Month”, an annual public awareness campaign conducted by Te Ara Ahunga Ora [the Retirement Commission] to help improve financial well-being.
With that in mind, I thought I would give aspiring investors an opportunity to buy stocks
I’ll tell a secret it’s a lot easier than people think.
If you follow two simple rules, you can hardly go wrong.
One is to be well diversified, the other is to focus on the long term without letting the present throw you off course.
The first part is easy.
Any decent advisor will preach the gospel of diversification, and if you’re a smaller investor, there are index funds that make this suggestion easy to follow.
Those who have more capital have the luxury of using a combination of funds and direct shares and thus tailoring a portfolio more specifically to their needs.
Advertising
Advertise with NZME.
That could mean increasing income generation, targeting parts of the market that offer better growth, or aligning a portfolio with sustainability goals.
The most important thing is to spread your risk and cover your bases instead of being too focused.
In 2022, the energy sector rallied while the technology sector fell 29 percent, but that year technology stocks rebounded 46 percent and the energy sector was one of the weaker sectors.
If you’re not good enough at picking next year’s winners and losers, you’d better play it safe and keep a little of everything.
The second piece of advice can be more difficult to follow.
Keeping an eye on the long-term game is a lot harder than it sounds, especially during times of uncertainty (which are common).
However, it’s non-negotiable, and if you feel like you can’t keep it going for at least five (if not ten) years, the stock market isn’t the place for your money.
The thing about financial markets is that the further into the future you look, the more predictable things become.
Advertising
Advertise with NZME.
Since 1945, the annual return (including reinvested dividends) on US stocks has been 11.2 percent, and the market has risen for 60 of those 78 years.
That’s an impressive return and a solid hit rate over eight decades, even if short-term swings have been significant.
The largest increase in a 12-month period was 60 percent (in 1983), while the largest decrease was 43 percent (during the global financial crisis of 2008 and 2009).
Things look a lot less scary when we group them into 10-year holding periods.
The proportion of positive returns increases to 97 percent, while the spread of the best and worst annual results narrows to 20.8 percent and -3.4 percent.
Switch to rolling 20-year blocks and this stock investor job seems easy.
US stocks have produced positive returns 100 percent of the time. The best annual return over a 20-year period is 17.9 percent and the lowest is 4.8 percent.
The results are similar for New Zealand equities.
If you look at the quarterly returns of our major stock market indices going back to the 1960’s, you’ll see that there hasn’t been a market decline in 10 years.
That’s the real secret of stock investing, and it’s not rocket science. If you are well diversified and have a sensible investment horizon, your chances of success increase dramatically.
It’s impossible to predict markets over days, months, or even years, but the longer you stick with it, the better the returns you’ll make and the volatility you’ll have to tolerate to reach those goals.
A well-constructed stock portfolio will almost always do well over the long term. The hard part is keeping that in mind when in the here and now (which is most of the time!) there is a long list of things to worry about.
It’s easy, but I never said it was easy.
Mark Lister is an investment director at Craigs Investment Partners. The information in this article is for informational purposes only, is general in nature and does not take into account your financial situation, goals, objectives or risk tolerance. Before making any investment decision, Craigs Investment Partners recommends that you consult an investment adviser.
Comments are closed.