‘A terrible year for investors’ will be hitting the headlines as you are enjoying a morning coffee on a beautiful summer morning – don’t let it spoil your day.
2022 will be a negative year for many super balances, even though the Australian share market was only just into negative territory – you can thank fossil fuels for that result, as the rest of the world share markets were far greater into the red.
You know that you have had a tough year when even the fixed interest fund managers, that are meant to provide security when shares falter have also had a down year.
But does last year’s return really matter?
If you were only investing for one year it does, but I would hope nothing further than a one-year term deposit was considered. Most of us are long term investors and in fact investing not only for our lifetime, but a legacy for our children and grandchildren. However, that emotional roller coaster of investing often leads us to look at the short-term results and then make decisions – normally the wrong one.
Is three, five or ten year past returns a good guide for what may occur in the future? While the longer the timeframe, the ‘smoothing’ of the investment return profile shows the benefits of staying the course, unfortunately even the last 10 years returns can be poor guide for the next 10-year returns.
If a share market has had a particularly poor 10-year period – such as the 1970’s in the US and Australia – the 1980’s was very strong for share markets. The gap between ‘good’ decades and ‘poor’ decades has lessened since, however, it is particularly useful at this point, with US technology sector having a tremendous run since the end of the GFC in 2012 all the way up to the end of 2021. Facebook, Apple, Amazon, Netflix and Google became the biggest companies in the world, but in 2022 fell about 40%.
The small disclaimer that ‘past returns are not a guarantee of future returns’ is reluctantly used by fund managers as they are, in fact, marketing their past returns. This disclaimer should be in big bold letters with ‘NOT’ highlighted.
The point of all this is, simply, don’t make investment decisions based off last year’s investment returns, it is an emotional decision that normally turns out to be the wrong one. It is the ‘fear’ and ‘greed’ factors that are taking over, and these never match up with long term investing.
Investment decisions need rational thinking — if a market is cheap, buy more and vice versa when a market is expensive sell more. You will never pick the top or bottom of a market but realising you are in the cheap or expensive territory and making decisions based off that will help.
Unfortunately, there is a lot of unhelpful noise, most of the time wanting us to hit the panic buttons from the so called experts, but you know better than them!
This article was first published in Personal Wealth Adviser Issue 5.
Jonathan Philpot is a director of HLB Mann Judd Wealth Management (NSW) Pty Ltd (AFSL 526052) ABN 65 106 772 696. Information based on historical performance is often not a reliable indicator of future performance. You should not rely solely on this material to make investment decisions.