Market movements - July 2008

The investment market update

Long-term returns remain sound

When it rains – it pours. This saying can certainly be applied to the investment markets at the moment. Since the June update, the Australian All Ordinaries Index has dropped 600 points, falling from 5,500 points in June to trading at just over 4,900 points at the time of writing.

To appreciate the extent of the markets decline over the last seven months, the Australian All Ordinaries Index has fallen from its peak of 6,853 points back in November 2007, and plummeted a staggering 26 per cent, including dividends as at July 2008.

This is without doubt one of the most significant declines that the Australian sharemarket has ever seen and definitely rivals - if not exceeds - the infamous October 1987 crash, which saw the market fall 42 per cent. In terms of raw percentage dollars, you would be correct in claiming that the recent falls could possibly rival October 1987.

But what you may not be aware is that the 12 months leading up to October 1987 saw a spectacular gain of 85.4 per cent on the Australian share market. In fact, even after the 1987 crash, the market was still trading at a higher level than it was just 12 months earlier.

In comparison, the recent market decline has wound back a full two years of Australian sharemarket gains, as measured by the All Ordinaries Price Index.

International share indices have fared better – but are still down substantially. The MSCI World ex-Australia Index, a broad measure of international sharemarket returns, has declined approximately 18 per cent since its peak late last year (as at the time of writing). This is around eight per cent better than the Australian share market.

But despite the severity of the recent decline of equity markets, it’s worth observing that long-term returns remain sound. The Australian sharemarket has returned 16.2 per cent per annum over the five years to 30 June 2008. International sharemarkets - on a hedged Australian dollar basis - have returned 12.4 per cent p.a. over the same time period. In fact, you could say that recent events have merely placed share markets a little closer to their long run average returns.

While the extraordinary events occurring in financial markets are concerning, history shows that in the long term, share markets have never failed to recover. Even if you had invested $10,000 into the Australian share market just before the 1987 crash, your investment would now be worth over $70,000*.

Maintaining your investment discipline in a market saturated with bad news is difficult. But it wouldn’t be called ‘discipline’ if it was easy. With poor news still flowing from the media on the turmoil embroiling financial markets, the natural inclination is to think falls will continue. But these may or may not eventuate. However, staying out of sharemarkets presents its own dangers - the risk of missing a recovery. You do so at your own peril.

*Assumes dividends reinvested into the S&P/ASX 300 Accumulation Index (All Ordinaries prior to April 2000)

 

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