Gone are the days, we are led to believe, where holding shares for the long term will bring any reward. Supposedly this is due to the notion we are on the edge of a financial abyss that will make the Great Depression look like a cake walk. Maybe this is true, but I would point out that there is nothing particularly unusual in dire predictions of doom and gloom.
In the share market there are always those that stand on corners with “the end of the world is nigh” sandwich boards. Inevitably, they will be proven correct, in the same way that a broken watch is right twice a day.
Of course there are other more rational and well respected commentators that can put forward very well reasoned arguments, and they can yield great insight. Indeed I am as concerned as the next man about the level of sovereign debt and the potential for a double dip recession. But the problem here lies not so much in the broad nature of these concerns, but in the specifics of how they will play out on the market and when (and indeed if) they will actually occur.
How and when?
For example, a small minority of free thinking economists were warning of a credit crunch as early as 2000. While their predictions were broadly correct, the world experienced many more years of substantial growth before the system started to falter. So in a very real sense you can be broadly right, yet specifically wrong. So will there be a prolonged and volatile period of little to no growth, or negative growth? Maybe so, but when will it happen and how exactly will it impact all the various listed companies? No one can say with certainty.
Ironically the overly fearful investor may suffer greater loss from the pessimism itself, as this can result in a paralysation of sorts, one that could result in forgoing potentially attractive gains (as anyone who failed to purchase around early 2009 can attest). The point though is that even if proven accurate, only the direst of predictions will have any significant bearing on the long term investor.
The Decade of Lost Growth
In recent history the justification against long term share ownership is the so called “decade of lost growth”; that is, the first decade of the 21st century which saw the US market (as represented by the S&P 500 index) drop about 22% between January 2000 and January 2010. (As it turns out the Australian share market, as represented by the ASX 200, rose 56% over the same period, and that’s without including the effects of dividends).
As usual, there is much more to the story. While it is indeed true that the S&P 500 dropped 22% over this period, it doesn’t necessarily imply that a sensible investor would have lost any money. For starters the regular index does not include the effects of dividends. Adding these in and reinvesting them along the way reduces the loss to just 6.75% over the same period. Still not great, but certainly a lot better.
The next point to note is that investors rarely just make one investment and then sit on their hands forever after. Usually in an effort to build wealth, investors make regular contributions to their investments as they continue to save money (or at least they should). Had an investor invested $10,000 in January 2000 and then added another $1000 to their holding every six months (that requires saving less than $167 each month), and also reinvested their dividends, they would have actually seen their capital grow over this period, albeit by only about 3%. Still, that’s a world away from a 22% drop, and is far from a disaster. It’s especially interesting to note that this period contains two of the most significant bear market periods in history; namely the dot-com bust (or tech wreck) and the GFC.
It is principles such as these that the DividendKey is founded on, and hence ensures that your longer term returns are not overtly impacted by such disasters as the decade of lost growth. The thing is, we can do far more to enhance our returns, and next week we will explore other techniques that would have seen you benefit significantly over this period, and using nothing that relies on the benefit of hindsight. But that’s a story for next week...
To be continued...
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