I recently read a wonderful article that all financial planners should read and commit to memory. In fact, it was one of my own recent columns in the Wealth section of The Australian. It focussed on how the stockmarket’s trend over 30 years has been our clients’ friend.
I was reminded of this when sharing a platform in Townsville with Robin Bowerman of Vanguard Investments. He showed arguably one of the busiest charts I have ever seen produced by a noneconomist! In fact it was so complex to visually digest that the producer on my Money Makers program on Sky Business said we couldn’t dare try to show it on television.
Not to be outdone – but, more to the point, not to deprive my viewers of the important message in the chart – I drew out the main points.
First, $10,000 invested in a portfolio that reflected the ups and downs of the sharemarket netted an investor more than half a million dollars between 1978 and 2007.
For the purists, the return was 14.7 per cent a year and it delivered $589,794.
If an investor opted for an interest-bearing security averaging a big 9.8 per cent, the end result was $159,279.
This nice result for shares came despite seven crashes or corrections, with the 1987 big kahuna of a crash taking the market down by 43.5 per cent.
For those who love these dinner party excitement facts, here are the actual figures:
1980 14.3%
1981 33.4%
1984 14.1%
1987 43.5%
1994 17.8%
1997 10.5%
It shows the stockmarket has amazing resilience, despite the dramas it can court.
It is also worth noting that dividends have been an important part of an impressive performance by shares over the past 100 years.
When Alan Sheen from Austock was on Money Makers, he stressed the point that dividends accounted for 50 per cent of shares’ returns. This is an area that we should be emphasising to our clients who are opting for self-managed super funds and direct shares.
One of the greatest trends in our industry is the growing number of planners becoming more and more transparent about their charging.
I once thought there was only one way – the right way – but clients have shown me that they differ and can come up with what I thought were irrational decisions.
One Melbourne planner, who charges a time-based fee for advice and service, quoted a client with $34 million to invest a cost of $12,000.
The guy, a successful small businessman, didn’t want to hit his cashflow and said he would prefer 1 per cent taken off his super!
Giving options for charging but being transparent has to be the starting point for our industry.
One final matter most of us must be worried about has to be the repeated sell-offs on global stockmarkets.
Clearly, our mantra has to be to point to the long-term scoreboard of what shares do, but there has to be a nagging concern that this time is different.
Usually cynics in the media use the “this time it’s different” cliché to ridicule optimists who think a boom can go on forever. However, it might be useful to rely on this defence for those who say we are in Great Depression rerun territory.
My economic history days tell me that the wrong responses by governments and monetary authorities made the slump worse than it should have been. Governments and central banks had been nothing short of hopeless until our Reserve Bank cut interest rates by a lateral thinking 100 basis points.
The UK Government went for the bank bail-out option and world central banks cut interest rates in a co-ordinated way. Addressing commercial paper problems in the USA was also initiated, which was sensible, albeit late! I believe central banks will keep cutting interest rates until demand turns, and I have been told by one economist, who tipped cuts were necessary before most, that a cash rate of 4 per cent is a possibility.
I hope he is wrong, because it could come with a recession. Australia could avoid a recession, but it’s going to require some great central bank and inter-governmental plays.
If we see this happen, then that Vanguard chart’s promise on long-term share returns should come true.
