If history is any guide - and let's face it, history is the only guide - it is a good time to buy shares.
Not that we are recommending it - we don't boast a financial services licence for one - but merely pointing out that it is statistically logical.
Research from Mark Hancock's Precept Investment Actuaries puts the return from Australian shares for the 20 years to June 30, 2012, at 8.9 per cent. That's if you bought, sat there, raked in the fully franked dividends and didn't trade.
As the endangered species of the self-funded retiree can attest, the average market return over the past five years has been minus 4 per cent. That is minus 13.4 per cent, minus 20.1 per cent, 13.1, 11.7 and minus 6.7 per cent respectively, which suggests the worm of probability should have turned.
"Based on the last 20 years and even the 10 years prior to that, in our opinion it would be statistically unlikely to have another negative five-year period going forward from 2012 to 2017."
That's on a five-year view. As Hancock points out, negative years tend to correlate, so it might be a smidgeon more likely that this year will be negative too.
This marries with our own highly illogical and unmathematical view - call it a vibe - that the bottom is yet to arrive and that recovery, when it comes, will be tedious and faltering as the world slowly deleverages from its debt binge.
Besides, markets tend to turn when there is universal pessimism and there are still one or two bulls still forlornly moping about the market paddock.
Over the 20-year period, Hancock calculates the average capital gain on shares at 4.6 per cent and the average dividend return at 4.1 per cent. In other words, virtually half the sharemarket's returns came from dividends and associated franking credits.
Yet, of those 20 years, only five produced a negative return, and three of these five have been in the last five years.
As an aside, the average return from a share fund or balanced fund during this time may amount to only half of Hancock's average annual 8.9 per cent, or thereabouts, once the bevvy of middle-people had all taken their cut.
The Precept report doesn't go there though. It just calculates compound returns from the S&P/ASX200 Accumulation Index, which excludes small and illiquid stocks.
On the numbers, this financial crisis is surely a "black swan", a once in a lifetime event already similar in scale to the 1929 crash and its aftermath. And it's not over yet.
The question is, is it something grander and more sinister a slow end to the present economic system? A purple, polka-dot
swan perhaps?
Even radical central bank intervention, rabid money printing, interest rates pinned near zero and bonds at record low yields, have not been enough.
Playing devil's advocate to the logic of Precept's equity market statistics, the boom of the early '90s to November 2007 was accompanied by an explosion in leverage. Average household gearing rose from roughly 60 per cent to 160 per cent.
At the same time, Australia's economic growth was fuelled by unprecedented Asian industrialisation and the computer and internet revolutions. These won't come again, although their effects persist.
Countervailing these dramatic "one-offs", the 30-year return from the All Ordinaries Index, from June 1982 to June 2012 that is, (excluding franking credits) is 11.9 per cent. Over time, equities tend to deliver 10 per cent growth, on average, annually.
Say gross domestic product growth runs 2 per cent to 3 per cent and inflation runs the same, company earnings should be at least 4 per cent to 6 per cent, before dividends. Even accounting for a "Japanese lost decade" scenario, and structurally lower equity returns, they are still likely to surpass bonds and other asset classes.
If the statistical assumptions are off the mark, watch out, the unassailable logic of hindsight may one day tell us we should have bought gold and headed for the hills.
GONE BEGGING
Having been away for two weeks, we are deeply saddened to have missed the opportunity to pass comment on the David Jones imbroglio. Such gift horses are too rare.
It was hardly a surprise however to come back and find another banking scandal, offshore naturally. The Aussie banking cartel is as pure as the driven snow, apart from the standard bastardry.
There is none of this money laundering for drug traffickers and terrorists, Mafia-style bid rigging against local governments, insider trading, front-running, mortgage fraud, or committing all manner of other frauds with impunity - while being mollycoddled by government. Nothing that springs to mind.
Now there's the Libor scandal where the likes of Barclays, HSBC, Deutsche, UBS, JPMorgan and Citigroup and a couple of French banks are under scrutiny for manipulating interbank lending rates - basically robbing the world. Quelle surprise!
Banks have been batting off bad press since servicing the Nazis during World War II. They've always been big on servicing dictators.
The difference now, indeed the great danger, is that they are too big to fail. They are the system.
So, if anyone has another massive yarn about cheating, thieving, collusion, bribery or whatever, pop it in the anonymous tips box.
A real scoop would be preferable, maybe a banker serial killer or a banker goes to jail ... or, heaven forbid, a banker has to pay back bonuses.
Frequently Asked Questions about this Article…
Is now a good time to buy Australian shares based on historical data?
The article notes that, historically, buying shares has often paid off: Precept Investment Actuaries calculated a compound return of 8.9% pa for Australian shares over the 20 years to 30 June 2012 (including fully franked dividends). It also observes that the recent five‑year stretch to 2012 averaged about -4% pa and that, statistically, it would be unlikely to see another negative five‑year period from 2012–2017. That said, the piece explicitly isn’t a recommendation and warns markets can remain weak and recover slowly, so this is context, not personalised advice.
What were the long‑term Australian share returns reported by Precept to June 30, 2012?
Precept’s research put compound returns from Australian shares at 8.9% per annum for the 20 years to 30 June 2012 (that figure includes fully franked dividends). Over that period the average capital gain was about 4.6% pa and the average dividend return about 4.1% pa, meaning dividends and franking credits made up roughly half of total returns.
How did the Australian sharemarket perform in the five years up to mid‑2012?
The article reports an average market return of roughly -4% pa for the five years to mid‑2012, with annual results of about -13.4%, -20.1%, +13.1%, +11.7% and -6.7% in that sequence. The author uses those numbers to suggest the odds favour some recovery over the next five years, though volatility and correlated negative years are possible.
How important are dividends and franking credits to overall sharemarket returns?
Very important: according to the Precept numbers cited, nearly half of the 20‑year return to June 2012 came from dividends and associated franking credits (average dividend return ~4.1% pa versus average capital gain ~4.6% pa). The article highlights that dividends can be a major component of long‑term equity returns.
Will a managed share fund return the same 8.9% as the S&P/ASX200 Accumulation Index?
Not necessarily. The article points out the Precept calculation uses the S&P/ASX200 Accumulation Index (which excludes small and illiquid stocks) and doesn’t account for fees and intermediaries. It warns that returns from a share or balanced fund may be materially lower — the piece suggests they could be around half of Hancock’s 8.9% once middle‑men and fees take their cut.
What macro assumptions underpin the idea that equities deliver about 10% over time?
The article cites a 30‑year All Ordinaries return (June 1982–June 2012, excluding franking) of 11.9% pa and notes that equities tend to deliver roughly 10% growth on average over long periods. It explains this in part by assuming GDP growth of 2–3% and inflation similar, implying company earnings might grow about 4–6% before dividends — though it also cautions that one‑off booms (Asian industrialisation, the internet revolution) and leverage increases can distort past returns.
How does the article describe the impact of the 2007–2009 financial crisis on long‑term investing?
The article calls the recent financial crisis a 'black swan' event comparable in scale to the 1929 crash and says it’s not over. It warns that extreme events, heavy leverage in the boom years (household gearing rising from roughly 60% to 160%), and radical central bank intervention have changed the market backdrop, so historical averages may be less reliable in the short term.
Do banking scandals like the Libor affair change how everyday investors should view banks?
The article highlights growing distrust around large banks, naming institutions under Libor scrutiny (Barclays, HSBC, Deutsche, UBS, JPMorgan and Citigroup) and describes banks as 'too big to fail' and central to the system. It presents this as a concern for investor confidence and systemic risk, but stops short of specific investment recommendations — it’s context to help investors understand industry reputational and regulatory risk.
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