The bigger picture

- BT Funds Management


“Well, we all thought it was good advice at the time — cash was safe and generated a small income, and the lady was at an age when many investors were winding back their exposure to growth assets. The problem was that the cash investment didn’t generate enough income to support the lady in her 22 years of widowhood.

So, she had to tap into her capital as well. By the time she died at age 92, there wasn’t much left.
She had wanted to leave some money to her children, so even at her age, the advice she received failed to take account of her long-term goals. Despite being a ‘senior citizen’ at 69, she was clearly still a long-term investor.”

Michael tells that story because the lady in question was his mother and the ‘bad’ adviser was himself.

Michael’s father died in 1974, which was a year when share markets fell heavily. The ‘OPEC’ oil crisis of 1973 created an environment which ‘spooked’ investors and advisers alike. Michael, himself a stockbroker in London at the time, was similarly ‘spooked’. He explains to his audiences today that he failed to take into account the long history of share market behaviour which suggested then, and continues to suggest today, that share prices do recover after a fall.

There is plenty of evidence to suggest that investors are just as worried today about the recent volatility in share markets. But Michael’s view is that if we form an opinion based on statistical evidence of just how long the ‘long-term’ may actually be, we can feel far more confident.

How long is long-term?

In his presentation, which endeavours to reassure nervous investors, Michael cites himself as an example and explains why ‘longterm’ to him means a minimum of 36 years.

“As a 65 year old male, statistical evidence says I’m expected to live till I’m 84, so my investment timeframe is at least 19 years. However, my wife is 12 years younger than me, and her life expectancy when I’m 84 will be another 17 years (women typically live longer than men!).

Unless I want to leave my wife with nothing, I need to consider myself a 36 year investor (ie 19 + 17 = 36). If there were children or grandchildren to consider, the term would perhaps be infinitely longer. That’s why I’m still a long-term investor.”

Even so, it’s still a hard sell convincing anyone who’s seen the value of their investments fall over the past two years that share-based investments such as ‘Balanced Funds’ really are a good long-term investment vehicle.
Michael stresses this point.

“To really understand the power of the share market in contrast to cash, you need to look at how the share market has performed over its very long history — not just the booms and busts that attract the media’s attention. Yes, there have been falls; the big falls of 1929/30, 1973/74, 1987, 2002 and 2008 are all significant.

“But over the course of the 100 years of history of the Australian share market, we’ve experienced about 80 years of positive annual returns and only about 20 years of negative annual returns. Even if you look at more recent history, since 1980 the market has generated a positive annual return for 20 of these 29 years.
“We also know that after most falls, the market really bounces back strongly — and quickly.
Even after the terrible falls of the past 18 months, the Australian market has climbed back significantly this year.”

Does this mean investors are too late to get into the market? — “No” is Michael’s emphatic answer.
“If we really accept that virtually all of us are long term investors and provided that we observe sensible ‘rules’, it’s never too late to start investing.’

Invest regularly

One of these sensible rules is to regularly invest a little at a time. This method removes the sense of trying to determine the best day to invest — nobody can be sure which day that is — so by investing a little of our available money every month, we average our purchase prices over time.

To illustrate the point, Michael includes a series of slides in his presentation that show the growth of AUD$100,000 invested in a term-deposit in 1980, compared to AUD$100,000 invested in an Index Fund which replicates the movement of the whole Australian share market. Notwithstanding the various ‘corrections’ between 1980 and today, the share market investment would have grown to more than AUD$1.2 million by the end of August 2009, while of course the term deposit still has its original dollar value of AUD$100,000.

Had the investor decided to reinvest his share market dividends and term deposit interest, the numbers would be staggering — more than AUD$2.5 million for the share market and about AUD$1 million for the term deposit.

“Certainly share markets go down periodically, but they go up much more often.’
Michael underlines that these numbers are not made up or the result of having picked out the ‘best’ shares. Instead, they are the outcome of a very sensible, diversified share portfolio made up of good shares and bad shares alike. The period (1980–2009) includes the share market crash of 1987, the tech boom/bust, the ‘recession we had to have’ in 1990 and the Global Financial Crisis of very recent times.

The role of cash

Michael acknowledges that cash investments will always have their place in a balanced, diversified investment strategy. The real point he’s trying to make is that investors of all ages need to step back from their emotional responses to short-term share market movements and concentrate on an understanding that share markets tend to be reasonably predictable when we really do look the big picture.
“Just ask yourself what you really want from your investments? If it’s creating wealth over the long-term, then cash isn’t the solution.

Warren Buffet said it perfectly when he said that cash might make you feel comfortable but it’s a terrible long term asset, paying virtually nothing and certain to depreciate in real value — after inflation.”

Need help to ‘step back’ from an emotional response to the share market? Contact NZIJ on 0800 90 60 90 and we can refer you to one of our associated qualified financial advisers.