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Four all-time best charts for every adviser and investor

I have read countless books on investing, met an enormous number of financial experts and fund managers, and made pretty much every investing mistake possible.

If I could distil my learnings into one statement, it would be this:

The short term is unknowable, but the long term is inevitable.

Let me share the four best tables from 30 years of investing.

1. The long term is inevitable

The stockmarket has good years and bad, but over the long term there is only one trend, and it is up. Despite this being obvious, I continue to be astounded at how investors behave during ‘bad’ years.

Calendar year 2022 marked the 147th year of trading on Australian exchanges (under various guises). That enormous amount of data provides the clearest guide for anyone willing to learn. During this period, the market (dividends plus share prices) has risen 117 years and declined 30 years. So 79.6% of the time, the market rises. One in five years on average, the market declines.

Source: Katana Asset Management

When the market rises, it does so by an average of 16.1%, and when it declines the average is minus 10.1%. When combined, we see that over the past 147 years, the market has averaged a return of 10.8% per annum.

Since we have become more sophisticated and introduced the Accumulation Index in 1979, the data points to an even stronger outcome. Over the 43 years since 1979, the market has risen by an average of 13.0% per annum. And this is despite some seriously scary episodes, including the 1987 stockmarket crash, the 1997 Asian Financial Crisis, the GFC and the fastest fall on record, Covid-19.

2. Volatility is the price you pay for a seat at the table

But of course, in the short term – from year to year – markets are volatile.

The distribution curve is shown below but many investors have failed to grasp the most important aspect.

Source: Katana Asset Management

The main point is that crashes are inevitable: be ready and don’t panic at the bottom (the only time to panic is at the top).

There has only been one (calendar) year in the 147-year history where the market fell by 30% or more, in 2008. But if you panicked and sold during that crash, you would have missed an extraordinary recovery. In 2009 the market was up by 39.6% and rose in 11 of the 14 years following the crash, including by 18.8% in 2012, 19.7% in 2013 and 24% in 2019.

Know thyself. If you are prone to doing the wrong thing at the wrong time, stay out of the stockmarket. Or work with a trusted financial adviser who can coach you through such periods.

3. Rolling period returns ... my favourite and best

To better understand how the market behaves over different timeframes, we can break the data into rolling periods. For example, a rolling five-year period is the average return over every five-year period since 1875.

What this table demonstrates is extraordinary.

Source: Katana Asset Management

If you had invested your money in the index, turned off your screen, went away and came back five years later, then on average you would have a 65% return. There would have been only seven occasions out of the 143 rolling five-year periods where you would have a negative return.

If you had invested your money in the index, turned off your screen, went away and came back in seven years later, then on average you would have a 100.6% return, and there would have been only two occasions where you would have a negative return.

But even more remarkably ...

If you had invested your money in the index, turned off your screen, went away and came back eight years later, then on average you would have a 120.2% return, and there would have been NO occasions on record where the dividends and capital growth would have been negative.

There is only one long-term trend, and it is up.

4. Wait … here’s a better table!

Source: Katana Asset Management

We’ve literally compiled hundreds of tables over the past three decades, and this is our best. There are two critical points.

First, we see even more dramatically, the true power of compounding. Compounding for 10 years, produces the equivalent of 17 one-year returns. Impressive. But compounding for 20 years produces the equivalent of an extraordinary 63 one-year returns!

And second, the importance of generating an extra margin. The Katana Australian Equity Fund has generated an extra 2.7%+ per annum net of all fees for 17 years. If we take a 2.7% per annum margin and compound it over 10, 15 and 20 years, the effects are mind-boggling. Over 10 years, it is the equivalent of 24 one-year returns. Over 20 years, this generates the equivalent of 107 one-year returns. Difficult to believe, but true. Generating an extra 2.7% per annum (net) generates the equivalent of 107 one-year returns versus 63 one-year returns without it.

Timeframe, timeframe, timeframe

If the short term is unknowable and the long-term inevitable, an investor really does need to focus on the long term. If through age or financial circumstance an investor does not have the luxury of a long-term horizon, then they should understand the extra risk that they are taking on.

Remember in the stock market, volatility is the price you pay for a seat at the table. There will be another crash. Guaranteed. If your time horizon is not beyond the next crash, or you panic and do the wrong thing at the wrong time, then discretion may be the better part of valour.

 

Romano Sala Tenna is Portfolio Manager at Katana Asset Management. This article is general information and does not consider the circumstances of any individual. Any person considering acting on information in this article should take financial advice. 

Past performance is not a guarantee of future performance. Stock market returns are volatile, especially over the short term.

43 Comments
Phil
March 27, 2023

The sequence of returns matters. Geometric returns.

MKD
April 23, 2023

Great article with well established detail of long term equity returns (especially SP 500).
However we need studies on dealing with sequence of returns and dealing with risks it presents in the context of an average human lifespan of work and retirement between the ages of 20 yo and 85 yo.
Assume no inheritance, no gifted money, no extraordinary business success or no winning the lotto. In other words no Elon Musk bias - no offence intended to his great destined fortune.

John Mann
March 27, 2023

Interesting to note that a number of people have discussed the impact of compulsory super however nobody mentions inflation and the value of a dollar now as opposed to 10 years ago.
What will happen if inflation continues and politicians mess with super (early access, taxed franking dividends, taxed limits, etc)

Mark
March 27, 2023

It has been mentioned, how without indexation $3M in the future will only have the purchasing power of today's $1M.

However it hasn't been legislated yet, so indexing may come about and there is always the possibility that it will be adjusted from time to time by different governments.

Rowan
March 26, 2023

I bought my first shares in 1984 and switched on share dividend reinvestment until I retired in 2018. The compounding effect of these reinvestments has made by retirement very comfortable. Yes, there have been some negative years but I've profited from buying at the bottom of 2008 and 2020. If you have the cash, dips should be seem as buying opportunities and not a time to sell down your portfolio.

alan
March 30, 2023

please give rowan an award for this comment

Irene
April 14, 2023

But if you only have a small amount of shares, which only can have a few shares from the dividend. DRP will have too much work when you sell the shares. That’s only from my experience.

Jake P
March 26, 2023

Australia has been the second best performing stock market in the world over the past 100 years. Whether it continues like that for the next 100 years is a big question mark and extrapolating past performance as this author has done is an error. There is nothing inevitable about the long term. Doubt it? See p 10 of Credit Suisse's global investments returns handbook here: https://www.credit-suisse.com/about-us-news/en/articles/news-and-expertise/global-investment-returns-yearbook-2023-202302.html


It shows the makeup of global equity markets changes dramatically over time, and countries which dominated decades ago, often fall by the wayside as performance suffers, for various reasons.

ROMANO SALA TENNA
March 29, 2023

There is no guarantee that your car's airbags will work. But there is enough empirical data to put our lives in them doing so.

Mark
March 29, 2023

My car doesn't have airbags. I still drive it quite happily.

It doesn't have autonomous braking, stability control, traction control, sat nav, adaptive cruise control, lane assist, reversing camera or even 4 wheel disc brakes but I drive it every day just fine.

Chris Gallus
April 09, 2023

Just look at Japan. In 1980s the 2nd strongest economy in the world. If you had invested $100,000 then, today you get back $80,000, and that's ignoring inflation.

Acton
March 26, 2023

The Katana share price has not matched these tables. Katana Capital Ltd is listed on the ASX as KAT. The share price of KAT on 30 Dec 2005 was $0.99. The share price of KAT on 24 March 2023 was $1.11. So if one bought $10,000 KAT in 2005, those shares (with no dividend reinvestment) would have grown 12% over 17 years to just $11,212. KAT dps was $0.005 in 2009, peaked in 2015 at $0.06 and has declined to $0.02 in 2022.

Barry
March 26, 2023

I have the exact opposite view.

The short-term is a lot easier to predict than the long-term.

I can predict where the ASX/200 index is going to be in the next few seconds or minutes a lot more accurately than trying to guess where it will be in 2, 10 or 20 years.

This means short-term arbitrage opportunities exploiting discrepancies between two markets are pretty reliable when they become available.

Keith
March 27, 2023

Indeed. But what you describe is speculation not investment.

Chris
March 25, 2023

Re the late 1929 to 1932 crash:
"Before the crash, which wiped out both corporate and individual wealth, the stock market peaked on Sept. 3, 1929, with the Dow at 381.17. The ultimate bottom was reached on July 8, 1932, where the Dow stood at 41.22. From peak to trough, the Dow experienced a staggering loss of 89.2%."

"It was not until Nov. 23, 1954, that the Dow reached its previous peak of 381.17 i.e. 22 yrs later."

Romano, can you please comment on how this is shown in yr tables.

Chris
March 25, 2023

I agree that:

"The short term is unknowable, but the long term is inevitable."

There were in fact 2 yrs in a row of greater than 30% loss:

1931 138.60 169.84 194.36 73.79 77.90 -52.67%
1930 236.04 244.20 294.07 157.51 164.58 -33.77%

Not having a go at you individually. Just factual.

What you say of course is true apart from the above.

What concerns me is comments in the article like this:

"The main oint is that crashes are inevitable: be ready and don’t panic at the bottom (the only time to panic is at the top)."

This infers some hidden wisdom that people like you know when to panic at the top but not at the bottom :)

Don
March 24, 2023

Remembering of course that it takes a 43% gain to offset at 30% loss, hence the need for a positive skew to the return side when showing percentage losses and gains

Dudley
March 24, 2023

"showing percentage losses and gains":

The (average of % changes ((Close / Open - 1)) results in 'meaningless' number as you allude to.

The (average of ratios (Close / Open)) - 1 produces the average rate of growth which is much more meaningful.

From figure 2:
%Change \ Count \ Ratio=Count*(1+%Change/100)
-35 1 0.65
-25 3 2.25
-15 7 5.95
-5 19 18.05
5 30 31.5
15 51 58.65
25 16 20
35 6 8.1
45 8 11.6

Total count: 141, Total Ratio: 156.75, Average growth rate: 11.2% (Figure 1 average return 10.8%)

Steve
March 24, 2023

A very encouraging and calming article. We should sleep soundly even in negative years with historical evidence that this is short term.
One comment on Aust market since 1979 is that for most of this time, there's been compulsory super, AND the percentage of super to wages has been increasing. Starting in 1993 at 3% of wages for 80% of employees. Now it's 10.5% of wages. The $A trillions of super raised has definitely pushed the market higher and quicker. When the contribution percentage to super is maxed out, we should expect the rate of increase in Aus Stockmarket to be measurably ower. (Pre 1979 levels?) Not to worry, but last 30 years will have been an outlier time...

BIPIN DESAI
March 24, 2023

My experience confirms that share market is for long term investment, not for short term investment.

Guy Mudie
March 23, 2023

This article is a good advertisement for investing in low cost and tax efficient index funds from an active manager!

ROMANO SALA TENNA
March 24, 2023

I'm not sure you read table 4. If you did, I'm afraid that you did not comprehend it. Table 4 demonstrates the complete opposite to your statement.

Guy Mudie
March 24, 2023

Point taken Romano - providing you are able to choose a fund manager who is able to consistently outperform the index. Such managers are not the norm.
ETF's and other listed low cost options are popular because they are easy to access and they remove the risk of their chosen managers underperforming and others that charge high fees and then become closet index huggers.
Consistent outperformance net of management fees with the accessibility of a listed structure would be a game changer for investors.

DH
March 23, 2023

I'm not a historian but I thought a whole of market index has not been around for 147 years to be able to invest in. This makes the article hypothetical at best.

Buffettfan
March 24, 2023

Not quite hypothetical: an index is a market value, an index fund is the way to invest in an index.

Thirty years ago I created a portfolio of the 12 largest companies on the ASX, weighted by market cap, ie an approximation to the index. Rebalanced every blue moon and it has tracked the market index very closely. So there is no need to buy an index fund, because with little work you can have an equivalent without any fees, unplanned taxes etc.

Ian
March 27, 2023

I would be interested to know the makeup of these 12 companies, assume 4 banks, 3 miners, a phone company, a few retail shops, and some property trusts...?

Denial
April 01, 2023

Yes you're correct not the same so interesting to see how index data was collated here for this analysis. I US indicies do in fact have negative 10 years periods so surprised we didn't also. Only over 20 year period was there no period of negative returns in US

Frank Gilbane
March 23, 2023

FrankG
Great reading.
I've passed it on to my BIG kids

john flynne
March 23, 2023

a good selection but just remember Albo's pension indexed is equivalent to about $6.4 million and they are saying it is to hard to deal with . Surely any taxpayer should be able to aim that high. Note I did not include the spouse/partnner's entitlement part after he dies.
This of politicians who are receiving generous pensions still be paid to manage super funds .

it really needs a complete review not this patchwork approach

Rev171
March 27, 2023

@john flynne,

While I understand the basis of your comment (and let's face it, we hear similar comments all the time), there's more to it than implied in the throwaway lines.

Albo's pension fund was closed to new members in 2004. Almost no one (apart from a few very longstanding members of the parliament (like the current PM and a handful of others) is eligible for it). Since then, all members and senators elected to the federal parliament are members of a standard accumulation superannuation fund, subject to the same rules as every other punter (i.e. me and you).

A couple of points to note:

1. the old parliamentary pension wasn't a superannuation fund, it was a pension fund, which is why the existing recipients pay income tax on the payments they receive until the day they die, unlike most superannuation income received by retirees 60 years and older.

This is because unlike a normal superannuation pension being tax-free after the age of 60, defined benefit pensions (a life pension) from the government provides an untaxed pension – and an untaxed pension after the age of 60 is taxed at marginal rate less the tax offset.

The difference between this treatment and a normal pension is that the government doesn’t pay 15% contributions tax on contributions (and earnings) - hence is an untaxed fund, so the ATO then doesn't give recipients all the tax advantages of a normal superannuation pension, so the recipient still pays between $25,000 to $50,000 more tax on the income than the same income generated from a normal superannuation fund.

2. This type of pension is effectively an income stream (and a very nice one too), but they are not an asset; for example, you can't bequeath it to someone else in your will; it dies with you (or on the death of a surviving spouse).

3. There are a small number similar pensions still open to new members: the judicial pension and military pension come to mind, although I believe the current military pension is less generous than it once was.

I am not defending or attacking Albo's pension entitlement: that was what was (back then) available to all members that served three terms, and senators that served two terms. I also offer no opinion on the few pensions of this type that still remain. I'm just setting out a few facts in the (probably vain) hope that we can all consign the 'politician's super' references to the dustbin of history and instead focus on retirement income related matters that are actually important.

James
March 27, 2023

Not quite correct. My father had the government type pension scheme with SA Super, indexed for life. When about to begin he had the option of taking some or all as a lump sum. Sensible he stuck with the indexed pension and lived a long life. On passing, his widow received 67% of his entitlement, indexed for life. Before commencing she too had the option of cashing out some or all. I did Dad's tax and the generous 10% tax offset effectively made his pension "tax free", so it's smoke and mirrors really. He got a tax refund every year, despite no other investment income bar a little bank interest! The other glaring anomaly with the newer scheme is that public servants etc all get greater than 15% super contributions (paid by the tax payer). Why is this when the community standard is 10.5% and mooted to grow to 12%? You can't argue it's an offset for lower wages anymore as public sector wages, benefits and almost automatic annual wage increases with no productivity offsets are a given!

Michael O'Hara
March 23, 2023

Very clear and concise data. On finishing this excellent article, my mind casts back to Daniel Kahneman's "Thinking fast, thinking slow", and equivalent tomes. The average person, on average, dislikes losses more than they love gains. Or some such thing.

Intuitively, it makes sense that money invested into the engine room of an economy will grow with that economy. 'Animal spirits' under the watchful gaze of prudent regulators, should help those dollars benefit from productive areas of that economy, even if the overall economy moves through the occasional slump.

My overly simplistic take on these fundamentals is to divide investors into two groups - those focused on returns and those focused on risk.

A return focused person will look at these tables and decide there's no alternative. Invest into growth, and seek professional management to exceed market benchmarks.

A risk focused person will look at these tables and search for flaws. They'll research and investigate and wonder what those two negative years might have happened.

Anyone who has lived through the early '80's recession, the '87 share market crash, the '94 bond and share market lockups, the Asian Crisis, the grinding downtrend of Nov'07 to Mar'09, the Euro crisis and Covid, knows that living through turbulent and down times is more personal than a theoretical average of outcomes. These times can be a threat to a lifetime of effort.

The article's tables are a brilliant illustration of the benefits of allowing money free reign to make money. They are helpful in promoting a long-term approach and a sense of comfort against market difficulties and scary times.

The trick is less in the investment and more in the ability to keep that money in place long enough to gain those benefits. It's one hell of a difficult task. Financial planners can help, but we only deal with a tiny fraction of the community. It's a pity that these charts and the strategies they provoke, aren't more readily available to a wider slice of the Australian people.

SMSF Trustee
March 23, 2023

Would the Japanese stock market tell the same story?
If not then why should we believe that the future of the Australian market is going to be the same as its past rather than replicating the Japanese history?

Peter perfect
March 23, 2023

Who would invest only in the Japanese market?

G41
March 26, 2023

Google "Global Investment Returns Yearbook 2023 Summary". Basically, yes Australia is one of the best but just about any stockmarket in a democratic capitalist country has generated a decent premium above inflation and also bonds

Graeme Cant
March 24, 2023

Replying to Peter Perfect:

"Who would invest only in the Japanese market?"

The Japanese, actually. In the same way as the vast majority of Australian investors invest only in the Australian economy. Which is why it's a very sensible question to ask what will be the shape of the future Australian market/economy? Will it resemble Japan?

This article's strength is its long view which indicates the answer to that question. The shape of the Australian economy has varied significantly over the years since 1875 but has steadily grown regardless of the changes. As the author says, the long term is inevitable.

Wade
March 27, 2023

Well Japan’s Cyclically Adjusted Price to Earnings ratio got to over 100 times and Australia is sitting at only 19 times today.

Dudley
March 24, 2023

"The trick is less in the investment and more in the ability to keep that money in place long enough to gain those benefits.":

That trick requires starting at a young age with a small fortune and / or low costs in proportion to income.

Those starting from nought with large costs and small income, eg typical family with mortgage, have a narrow term, after 'paying off home' and booting kids, before retirement, to accumulate any out of the normal capital and in retirement will either have to take larger risks and / or smaller withdrawals.

In that narrow term, they are as likely as not to see a large market crash, or boom, or neither. The outcome being sensitive to timing of 'investments'.

Most have very limited capacity to exploit long term outcomes; the Age Pension awaits.

Rod in Oz
March 24, 2023

You're realistic Dudley; thanks.

Dudley
March 25, 2023

In absence of Age Pension:

With 12% Superannuation Guarantee, as ratio of Gross income of 1, future value:
= FV((1 + (1 - 15%) * 8%) / (1 + 3%) - 1, (67 - 27), -(1 - 15%) * 12% * 1, 0)
= 9.01 (times gross working income)

Withdrawal / y from disbursement ('pension') account to deplete capital at 87:
= PMT((1 + 5%) / (1 + 3%) - 1, (87 - 67), -9.01, 0)
= 0.55 / y ( times gross working income)

ROMANO SALA TENNA
March 24, 2023

Thanks Michael for your comments. We also have a heart for educating advisers and investors with these types of tables and insights. We have built a presentation highlighting these key lessons. It has been presented more than a dozen times and received excellent feedback. We are happy to present it to any group of investors or advisers at no cost.

JF
March 23, 2023

This is fantastic. Thank you

Leigh Smith
March 23, 2023

Great insight. Thanks

 

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