Article from Trading Tutors Newsletter.
A lot of comparisons have been made between the current Global Financial Crisis and the great depression, and indeed there are many similarities. Unfortunately though, such comparisons seem to provide little scope for optimism, especially for the longer term investor. After all, anyone who bought prior to the crash in October of 1929 would have had to wait 25 years before their capital was recovered!
Similarly long periods are quoted for more recent market crashes, such as the 1987 crash where it took 9 years for new highs to be created. So there is little reason to think that even if the market is close to the bottom, we will see a swift return to 2007 levels. But does this mean that people who were invested in the market prior to this most recent correction should abandon all hope?
The long recovery periods that are quoted assume that all your capital is invested at the absolute high of the market. For those who had been regularly contributing to their positions in the years prior to the crash, their breakeven point will be well below that of the market high. This is because a significant run up is usually seen in the lead up to a crash. In the case of the Great Depression, the Dow advanced 244% in the 5 years prior to the crash, and 54% in the year prior. An investor who had been regularly adding $1,000 to their portfolio each quarter for 5 years prior to the crash would have seen their invested capital recover in just 7 years instead of 25. This still isn’t fantastic, but it’s a significant improvement in recovery time.
Continued investment following the crash helps improve the situation further still. In the above example, had the investor continued adding $1000 each quarter, they would have seen a 42% return on invested capital over the same period. This is because we tend to see substantial gains from the low of the market. Following the low of 1932, the Dow rallied 63% in just one year. The annualized growth over the next 4 years was a massive 31%.
Professor Jeremy Siegel, a noted expert in financial markets, has conducted some interesting research in this area. He has demonstrated that for the 7 largest corrections over the past 145 years, the market showed an average improvement of 24% in the year following the crash.Moreover, he noted that there was an observed 21.4% improvement per year over the next 3 years, and 18.4% per year over the next 5 years. Clearly, it pays to invest into the markets following a large correction.
The worst thing investors could do at this point is to pull up stumps and walk away from the market. Indeed, investors should be looking to add to their portfolios, average down their entry prices and position themselves for recovery. It may well take the market 10 years to get back to 2007 levels, but that doesn’t mean you have to wait that long.
Andrew Page.
THE Australian share market yesterday ended its worst year ever with investors looking back on losses of more than $700 billion.
Some maybe hoping that 2009 _the Year of the Ox in the Chinese zodiac_ will strengthen the market, which fell 41.3 per cent in the past year.
The Ox is meant to symbolise patience and inspire confidence.
While market participants are not expecting a stampede of bulls to drive shares higher, they are hoping the oxen trait of strength will bring an end to the worst financial crisis since the Great Depression.
``We would believe in anything at the moment,'' a weary institutional sales trader said yesterday. The benchmark S&P/ASX 200 ended the year in positive territory, rising 68.1 points, or 1.9 per cent, to 3722.3, paring losses for the past 12 months to 41.3 per cent, or about $680 billion.
The broader All Ordinaries rose 67.9 points to 3659.3, taking losses for the year to 43 per cent, or $718 billion _ the worst annual percentage fall in the history of the Australian share market.
Almost half of that was lost in the last three months of the year following the collapse of US investment bank Lehman Brothers in September.
The Australian dollar closed locally at US69.08c, down 30 per cent from the July 15 peak of US98.49c and 21 per cent lower than the start of the year.
In a year most people would rather forget, 536 companies fell while only 41 finished higher.
Among the leading blue chip companies, BHP Billiton rose 2.7 per cent to $30.44 yesterday, paring its annual fall to 24 per cent after walking away from its takeover bid for smaller rival Rio Tinto.
Rio rose 2.6 per cent to $38 for a loss of 71.6 per cent since the start of 2008.
A solid finish among the Big Four banks trimmed losses over the past 12 months to between 39 per cent and 51 per cent amid concerns over their bad debt exposures.
Telstra finished the final session of 2009 higher at $3.83, but was down 18.3 per cent for the year after the federal Government dumped the telecoms giant from the bidding process to build the high-speed national broadband network.
Big losses were felt in stock markets around the world as investors cashed in their shares and sought shelter in safe haven investments such as government bonds and US dollars.
What started as a sub-prime lending crisis in the world's biggest economy in August 2007 has morphed into a global financial and economic disaster.
Despite the doom and gloom hanging over the global economy, some market participants believe they can see light at the end of the tunnel.
Eight senior analysts by The Australian forecast that the All Ordinaries would rise by an average 20 per cent in 2009 and oil would climb back up to $US62 a barrel after trading around $US30.
Their average estimate for the Australian dollar was US72c.
Most of the gains in the share market are expected to come in the second half of the year.
AMP Capital Investors chief economist Shane Oliver said he expected shares to remain volatile in the first six months as investors digested more grim economic data.
``We are yet to see the rise in unemployment that the rest of the world is seeing and we are yet to see the full impact of the China downturn,'' he said.
``Economic news will be getting worse before it gets better and we will tip into a mild recession, I would expect.
``But in the second half of the year we will be starting to see signs that the worst is over and that should start to provide a bit more confidence for share markets.''
Dr Oliver expects the share market to rally to 4500 by the end of the year and history is on his side.
The debt-laden Babcock & Brown won the unenviable title of worst-performing stock of 2008, while two of its funds Babcock & Brown Power and Babcock & Brown Infrastructure ranked in the top 10 worst-performing stocks.
The three companies recorded falls more than twice that of the broader market.
Despite the annus horribilis, some companies managed to record performances that would be rated exceptional in any year.
Linc Energy surged 162.5 per cent to $1.995, pipping AGL Energy and Origin Energy for the title of best-performing company in the top 200 index of 2008.
