I have read countless books on investing, met an enormous number of financial experts and fund managers, and made pretty much every investing mistake possible!
If I could distil my learnings into one statement, it would be this: the short term is unknowable, but the long term is inevitable.
Let me share my three all-time favourite tables from 30 years of investing.
The long term is inevitable
Firstly, the stock market has good years and bad, but over the long term there is only one trend and it is up. Despite this being obvious, I continue to be astounded at how investors behave during ‘bad’ years. We are now into our 146th year on Australian stock exchanges (under various names). That enormous amount of data provides the clearest guide to anyone willing to learn. During this period, the market (dividends plus share prices) has risen 117 years and declined 29 years (returns used in this article are nominal, not real adjusted for inflation). So 80.1% of the time, the market rises. One in five years on average, the market declines.Source: Katana Asset Management
When the market rises, it does so by an average of 16.1%, and when it declines the average is minus 10.4%. When combined, we see that over the past 146 years, the market has averaged a return of 10.8% per annum. Since Australia has become more sophisticated and introduced the Accumulation Index in 1979, the data points to an even stronger outcome. Over the 42 years since 1979, the market has risen by an average of 13.0% per annum. And this is despite some seriously scary episodes, including the 1987 stockmarket crash, the 1997 Asian financial crisis, the GFC and the fastest crash on record, Covid-19.If there is a better table than this, send it to me …
To better understand how the market behaves over different time frames, we can break the data into rolling periods. For example, a rolling five-year period, is the average return over every five-year period since 1875. What this table demonstrates is extraordinary.Source: Katana Asset Management
If you were to invest your money in the ASX (index), turn off your screen, go away and comeback in five years’ time, then on average you would have a 65.1% return, and there would have been only seven occasions out of the 142 rolling five-year periods where you would have a negative return. If you were to invest your money in the ASX (index), turn off your screen, go away and comeback in seven years’ time, then on average you would have a 100.7% return, and there would have been only two occasions where you would have a negative return. But even more remarkably, if you were to invest your money in the ASX (index), turn off your screen, go away and comeback in eight years’ time, then on average you would have a 120.4% return, and there would have been NO occasions on record where the dividends and capital growth would have been negative. There is only one long-term trend, and it is up.