Roller-coaster rides can be very scary and sometimes nauseous, particularly for first-timers. The good thing about roller coasters, however, is that they usually stay on the rails. The ASX 200 Accumulation Index rose from around 35,000 to 43,000 during calendar 2007.
It then dropped back to 33,000 in the first quarter of 2008 and, following a brief bounce, plummeted to its low of around 21,000 in March 2009 from whence it recovered to around 33,500 by late October. This eans that anyone who timed the market well by either switching portfolios within their super fund or shifting from shares to cash and back again will have made some exemplary returns over the past two years. It also means, however, that those who mistimed their shifts will have seriously aggravated the poor investment performance of the global financial crisis (GFC) years; that is, they will have done worse than the default option of doing nothing.
I suspect that many financial advisers will have been able to add value for their clients during this period because, at its worst, the market sell-off was so extreme that many companies and assets with relatively stable and predictable net revenue streams had their prices slashed along with the rest. More generally, advice will have depended hugely on what one believed about the China story. Equally, however, it is undoubtedly true that the retail advisory industry, along with the banks, was the prime mover in the massive expansion in margin lending in the period leading up to the crash, thus significantly magnifying losses for those clients.
Unfortunately we will never really know how particular accounting and financial planning firms performed, or even how the industry as a whole performed relative to benchmarks, due to the almost complete absence of any independent or verifiable advisory performance data. Had I been a financial adviser, I probably would have tended to err (so far) on the side of scepticism as to the strength and speed of the recovery in share prices; but I learned long ago not to place any great confidence in market timing. Hanging on the wall of my office is a chart sourced from Barron’s Online comparing, for the five years from 1999 to 2003, the average broker/analyst forecast close for the Dow Jones with the actual close. The average discrepancy was around 14 per cent per annum during this volatile period.
The chart is underscored by an anonymous quote as follows: “An economic forecaster is like a cross-eyed javelin thrower: they don’t win many accuracy contests, but they keep the crowd’s attention.” There are, in my opinion, relatively rare occasions when one can say with any great degree of confidence that an asset class is cheap or overpriced. The early 1990s, in regard to property, was an example of the former; and the early “noughties”, in regard to growth stocks, was an example of the latter. Even when you get that bit right, timing the stockmarket is a very tricky (and risky) business.
