Disclaimer. After nearly 40 years managing money for some of the largest life offices and investment managers in the world, I think I have something to offer. These days I'm retired, and I can't by law give you advice. While I do make mistakes, I try hard to do my analysis thoroughly, and to make sure my data are correct (old habits die hard!) Also, don't ask me why I called it "Volewica". It's too late, now.

BTW, clicking on most charts will produce the original-sized, i.e., bigger version.

Tuesday, August 2, 2011

The Long Term

We're inclined to worry a lot about short-term fluctuations in markets.  The media love drama:  they sell more newspapers/get more hits in bad times than on ordinary.  "Stock Market Losses Top $5 billion" is a catchier headline than "Stock Markets Gains Top $5 billion" Actually, though, in the fullness of time, the short term wobbles translate into huge long term growth.

Source:AMP Capital Investors, figures within brackets denote peak to trough % declines
This chart from AMP Capital Investors (and alas, it's the biggest I can make it), shows the long-term movement of the Ozzie stock market.  This is the total return, i.e., represents capital plus dividends and has been plotted with a log scale so that percentage movements are the same anywhere along the y-axis.  A chart for the US would have a different slope but the same aspect.

The long term return since 1900 has been 11.8% per annum (or 7.7% after inflation).  The calculation assumes that dividends are reinvested.  This period includes the great depression, the 1960s stock market stagnation (remember the nifty 50 share bubble?), the 1987 crash and the GFC.   The return since 1950 has been roughly the same.  You often hear people say, Oh, I doubled my money on my house since I bought it 20 years ago.  That sounds like a lot, doesn't it?  Yet it is a measly 3.5% per annum!  11.8% will increase your money by over 9 times over 20 years.  (I had to check that calculation to be sure I was right)

The markets may well go lower in the short term.  But there's every reason to believe that in 20 years time, assuming your reinvest your divvies, you'll have a lot more than you do now. And on that time horizon, at least here in Oz, it's a good time to buy.

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