The value of sitting out share market downturns
End-of-year data has confirmed that 2012 was very good for share investors with a total return including capital growth and dividends of just below 20 per cent for the year. The growth component was close to 15 per cent in the major indices, a much better outcome than most investors were expecting.
Unfortunately, the overall result doesn’t mean that all share investors are now well ahead in their investments. Overall, the broad indices are still 30 per cent lower than they were at their peak and it could be some time before investors in the pre-GFC boom period recover all the capital invested in shares.
For longer-term investors, the situation is much better in that many of the leading share investments have produced capital growth as well as a relatively high income yield.
As highlighted last week, the strong 2012 share performance was due to renewed investor confidence and a hunt for higher income at a time when interest rates were falling.
Even though the general market sentiment is that the share market will continue to be strong in 2013, this is by no means certain. Care needs to be taken with decisions to add to share portfolios.
Company and managed fund prospectuses always note, but not always in the boldest print, that past returns are not necessarily a guide to future returns. Every new investment needs to be considered on its merits, as do decisions on whether to take profits on shares that have increased in value.
The volatility of sharemarkets has been all too clearly demonstrated by the gyrations of the past five years. The risks can be reduced by not putting all your eggs in one basket and owning a diversified portfolio.
Also, because of the ageing of our population and the need for retirees to obtain regular incomes, an emphasis on dividend-paying solid companies is likely to help in a period when interest rates are low. There are higher risks investing in shares for capital growth, especially focusing on individual companies whose share prices have been rising.
The autopsy of the 2012 performance revealed several companies that more than doubled in value. But there were many more whose prices fell substantially during the year.
With all share investing, unlike cash and similar investments, there’s a need to be able to sit out downturns and allow prices to recover. The painful experience of investors who lost their nerve or were forced to sell during the GFC, when the market was 30 per cent lower than it is today, should remind investors of this.