The attached note looks at five charts on investing to keep in mind in rough times like we are going through now. The key points are as follows:
- Successful investing can be really difficult in times like the present with immense uncertainty around the impact of coronavirus on the outlook.
- This makes it all the more important to stay focussed on the basic principles of successful investing.
- These five charts focus on critical aspects of investing that are insightful in times of market stress: the power of compound interest; don’t get blown off by cyclical swings; the roller coaster of investor emotion; the wall of worry; & market timing is hard.
The coronavirus crisis is first and foremost a human crisis and my thoughts are particularly with those on the front line of this battle. But, of course, its impacting many aspects of life at present, including investment markets. Successful investing can be really difficult in times like the present when markets have collapsed into a bear market with falls globally of around 30% from their highs amidst immense uncertainty about the economic hit from coronavirus and how much policy stimulus and central bank support can head off collateral damage and boost an eventual recovery. Trying to work this out is driving huge volatility in investment markets making it very easy for short term traders to get whipsawed. I will be the first to admit that my crystal ball is even hazier than normal right now. As the US economist, JK Galbraith once said “there are two types of economists – those that don’t know and those that don’t know they don’t know.” And this is certainly an environment where much is unknown.
But while history does not repeat in that each cycle is different it does rhyme in that each has many common characteristics. So, while we haven’t seen a pandemic driven bear market before the basic principles of investing have not changed. This note revisits five charts I find particularly useful in times of stress.
Chart #1 The power of compound interest
This is my favourite chart. It shows the value of $1 invested in various Australian assets in 1900 allowing for the reinvestment of dividends and interest along the way. That $1 would have grown to $242 if invested in cash, to $1017 if invested in bonds and to $481,910 if invested in shares. While the average return since 1900 is only double that in shares relative to bonds, the huge difference between the two at the end owes to the impact of compounding – or earning returns on top of returns. So, any interest or return earned in one period is added to the original investment so that it all earns a return in the next period. And so on. I only have Australian residential property data back to 1926 but out of interest it shows (on average!) similar long term compounded returns to shares.
Source: Bloomberg, AMP Capital
Key message: to grow our wealth, we must have exposure to growth assets like shares and property. While shares have collapsed lately amidst massive coronavirus uncertainty and the short-term outlook for Australian housing is vulnerable too, both will likely do well over the long-term.