Over 10 years they’ve never lost

With the sharemarket hangover fairy still bashing around inside our heads it can be tempting to proclaim “never again will I drink from that font of wealth creation.” But where’s the fun in that?

It’s time to continuously remind ourselves to take a strategic view and keep a long term perspective that matches the period we will be alive and investing. Finally some articles to that affect are appearing among the mass media doom and gloom.

You may think you have heard it before but keeping reading the good news – you need at least two pieces of bright news to outweigh the psychological impact of each piece of gloomy news.

Following is an excerpt of a long article by James Dunn in The Australian today. Rational analysis that enables you to learn from history.

Andex Charts has calculated the returns made by investments in the main accumulation index (share price growth plus dividends) of the Australian share market, made at every month-end since January 1, 1950, and held for 10 years. In the period to August 31, 2008, there have been 585 10-year investment periods — and not one had made a loss.

The lowest 10-year return was 2.9 per cent a year (for the 10 years ended September 30, 1974), while the best return was 28.7 per cent a year (for the 10 years ended September 30, 1987. The median 10-year return comes in at 13.3 per cent a year.

The most recent completed 10-year return — for the decade to August 31, 2008 — is 12 per cent a year. This is despite a 13.1 per cent fall in the last 12 months of that period. Reid says the index would need to have fallen by 66 per cent in September to produce a negative 10-year return.

The lesson in these numbers is that if you are certain that you can give a share market investment (that is, in the accumulation index) time, you can be confident that it will make money for you.

A financial planner would get into trouble for describing the share market as capital guaranteed but, statistically, the accumulation index is, if you hold it for 10 years.

Wealth creation is a long term project. Investing in growth assets like shares must always be considered with at least a 10 year horizon before you need to spend the money. Any time frame less than that is gambling with odds that are turning against you.