Take the long view
Brian Thomas
Research conducted by Perennial Investment Partners has found that investors who keep a short-term view of market returns may be missing out on significant opportunities and putting their long-term wealth in serious danger.
Perennial head of retail funds management Brian Thomas said now that sub-prime meltdown and credit crisis headlines are appearing in the non-financial press, many investors may be tempted to look at the stock market on a daily basis. “If you watch CNBC every morning and look at your portfolio every morning, then you’re probably going to be pretty upset. Because it looks as if the market is just going up and down, up and down. So this study examines the issue more scientifically.”
The study looked at the Australian stock market (all ordinaries accumulation index) between 1988 and 2007, and found that in those 4,957 days of trading only 55 per cent saw positive returns or at par.
“This result really surprises many people, and it puts things into a good perspective. And even as we’ve had this bull market over the last five years, 58 per cent of the time the market is either level or going up,” Thomas said.
“If you panicked on Friday 17th of this month and withdrew from the market you would have missed the biggest weekly surge in over 32 years the very next week, with Australian shares up 7.4 per cent.”
Although overall feedback from financial planners is that their clients have not panicked over recent events, Thomas is concerned that many investors may react to negative market sentiment on an overly emotional basis.
“It’s fascinating that, based on the Perennial study, if you were not invested (had a zero return) on the 27 best days in the market over the last 19 years, then your return goes down to the cash rate or risk free rate over that same period,” he said.
“The point I’m making is that it’s very hard to justify trying to ‘time’ the market. This study is about calming people who are panicking about the markets, because if you pull out now and try to time it you’d probably miss the next up-turn in the market.”
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