I have been asked many times for my predictions on the share market over the next week/month/six months and one year.

Early in my career I would discuss whatever was in the investment headlines recently and then extrapolate that over the asked time period. I was frequently wrong and probably below the 50% strike rate. These days I learnt have not to provide an answer, with the honest reply of ‘I don’t know, and your guess will probably be better than mine’.

I do not recall over my 20 years of advising, anyone asking me for my investment prediction for the next two, three, five or ten years. While I would still be very cautious with two and three year predictions, I feel much more comfortable providing a share market outlook for the next five and ten year periods.

This is because the volatility of share markets smooth over time, the range of likely outcomes narrows with each year. Investment returns will reflect the income you receive, the growth of that income and the purchase price today. Is the purchase price today cheap or expensive? If cheap your future returns will be greater, if expensive your future returns will be lower.

It is surprising to some just how accurate you can forecast share returns for the next 10 years, but when considered the process makes a lot of sense and it is not rocket science. Perhaps the more important question is not the
expected share market return for the next six or twelve months (I also don’t recall anyone predicting after the initial COVID outbreak in March 2020 that the Australian share market would rise 37% over the next 12 months), but how long do I wish to invest for?

If the answer to this, is only a short period, say if you are saving for a home deposit over the next couple of years. Then the share market is not the place to be investing for this short a period. The uncertainty of the return, if X, Y, Z was to occur, is too risky, a negative return is a real possibility. Unfortunately investing in a secure, fixed interest type of investment that we know will only provide a small return is the only real option.

However, many investors are actually long term investors. Indeed most people will invest for the rest of their life and then wish to leave a legacy for children and grandchildren – this is a long time! Therefore not worrying about whether now is the right time to invest or not, but looking at the expected returns for the next 10 years for each different asset class makes far more sense when building an investment portfolio and making the very important asset allocation decisions.

This may sound like I am recommending you purchase shares, put them in your bottom drawer and never look at them again. While this is not the worst strategy, it does ignore that share markets will move between being cheap and expensive. You do need to make decisions at least every couple of years when deciding upon your asset allocation.

The good news is that when considering 10 year forecast returns, you are able to make gradual changes to your asset allocation, typically over a number of years. The share market will not become expensive overnight. This will stop the emotion charged decisions we tend to want to make after a crisis occurs and result in a better investment outcome.

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.

This article was first published in Personal Wealth Adviser – Issue 2