The Sharemarket is ‘perfectly rational’
Peter is passionate in his faith in Industrial Shares on the Australian share-market. He cleverly showed the difference between people’s perception of the ‘safety of property ownership’ compared to the ‘high volatility risk in investing in shares’. Roughly translated, Peter defined ‘investing’ to him, means ‘holding assets for their income flows and for a long term’ (my interpretation of his words). Peter made the clearly logical statement that there are only two times when you know the real value of any asset:
- The day you buy it; and
- The day you sell it!
Sharemarket volatility removed
Whilst Peter gave an entertaining analogy of how he would fix our perceptions if he became PM, he showed a graph of share market movements over the past 29 years – and in your minds eye you can picture a very ‘ups and downs’ line, albeit trending upwards. He then showed that by drawing a straight line from the date of purchase of his first shares 29 years ago, to their value today, it became obvious that all of the sharemarket volatility during any period that you are holding shares is only disruptive, disturbing noise.
Equities (particularly Industrial Shares) compared with other investment assets
To highlight his argument that shares are safe, secure, dependable, boring assets he showed a graph of the movement of the Industrials Index (Australian) compared to a Term Deposit over the above 29 year period and the relative values and income performances of $100,000 invested in those assets in 1980: in short, the Term Deposit still had a capital value of $100,000 and had generated gross annual income of between $4,500 (2002) and around $16,000 (1990); in the meantime, the Industrial Index equities (shares) had generated a steadily ascending annual gross income ranging from around $7,000 (1980) to around $80,000 (2008) – and even after the market ‘devastation’ since December 2007, ended 2008 with a capital value of just over $1 Million!
Sharemarket volatility countered by income yield
There are obvious inferences to be taken from this. Peter also showed a graph depicting (listed) property returns and capital value over the same term – again confirming Industrial equities as a superior investment. Peter also took ‘yield seekers’ to task and demonstrated why income is different from – and far more important than – yield. It is illogical and inappropriate for instance, to compare share yields with cash interest.
In a series of reasonably dramatic slides, he also showed the annual fluctuations of overall share prices: over the past 109 years, the year-on-year movement has been negative 23 times (with the most recent event being the deepest); the remaining 86 times have been positive (with 10 of those years having grown by a greater amount than the most recent year fell).
Peter was vocal about his responsible caring for his family’s needs by long-term investing in shares compared to the irresponsibility of some of his peers, maintaining their faith in Term Deposits.
Investment strategy resolution
The Australian Equities strategy that Peter has espoused consistently is worthy of consideration by all investors: it is essential for most investors however, to consider a broader diversification to achieve their goals without risking sleep deprivation at times of high sharemarket volatility.
You can benefit from utilising the strategies that Continuum Financial Planners Pty Ltd can bring to you utilising an appropriately diversified investment portfolio with asset allocation tailored to your personal financial needs, goals and objectives: ‘we listen, we understand; and we have solutions’ and we apply them through personalised professional wealth management advice. Phone our office on 07-34213456; or use the Contact Us facility to make an appointment with one of our experienced advisers.
This article was originally posted in April 2009; and has been occasionally updated/ refreshed, most recently in April 2021.
