Why Asset Class Investing

The second of a three part series

Indexes

In October 2007 the NZX 50 was at 4327 – by March 2009 it had declined to 2417.  Those clients that bailed realised a 41% loss.  By March 2013 the market was back to 4300.  Those clients that invested $10k when the market was down, made a 36% profit.  Those clients that did nothing – from 2007 to 2013 neither lost nor gained.  By May 2014 the market has climbed to 5100.

The S&P 500 experienced similar volatility from October 2007 except it recovered more quickly than the NZX 50 and was back to a record high by March 2012 – 10 months earlier than its NZ equivalent.

There are three key points I wish to make in this 3 part series:

• It has all happened before.  Whilst ‘markets’ cannot be predicted with any short term certainty – history provides a degree of similarity and mean reversion
• Indexes are pure.  They measure actual stock market capitalisation and therefore provide unadulterated performance.  They surely are the sum of its parts
• Stock markets are volatile in the short term but the gains are always greater than the losses in the long term – they have always gone up by more than they have gone down.

In the Great Depression (1928-36) investors who did nothing recovered in 12 years and 8 months – from market bottom.  Those who sold out realised a loss of 83% (investors continued to receive dividends).

In World War II (1938-46) investors who did nothing recovered in 6 Years and 1 month – from market bottom.  Those who sold out realised a loss of 50%

In the Oil crisis of (1972-76) investors who did nothing recovered in 22 months – from market bottom.  Those who sold out realised a loss of 43%

The technology bubble of (2000-03) bottomed in March 2003.  It took 4 years and 2 months to recover but those clients who invested at the market low, made a 41% profit – and those who sold out realised a 45% loss.

The NZX 50 is an index capitalisation (number of shares x price) of the top 50 NZ companies.  Unlike ‘capital’ indices the NZX 50 is a ‘gross’ index as it assumes reinvestment of dividends.  NZ companies issue unusually high dividends as opposed to retaining profits, a practice most overseas companies use to build business value.  The NZ Stock exchange believes the gross index allows for a truer comparison with alternative overseas indices (due to the higher dividend yield) and a truer comparison to other investment classes, such as property or fixed income.

The NZX 50 index is up about 11% on the same time last year and trading volumes are up by 40% - the stocks portion of the total exchange are now worth more than $90 billion, swelled by 10 new company listings.  At the low of the GFC (December 2008) an estimate placed the value of investment in public stocks, bonds and managed funds including superannuation at $96 billion compared with $90 billion in term deposits and $200 billion in residential property investment.  Total trades on the NZX is up 150% compared with the same time in 2009.

In NZ we are certainly growing up when it comes to investment.  Perhaps the Capital Markets Taskforce formed by the Labour Party in 2008 and chaired by Rob Cameron got it right – by the time the taskforce released its report in late 2009 the National Government was in power.  The report contained 60 recommendations for overhaul including: the listing of state owned companies (Mighty River Power, Meridian, Genesis) the creation of the Financial Markets Authority and the introduction of the Financial Markets Conduct Act (introduced April 1^st).

Understanding international indices is important for investors to measure – without measure especially long term, investment decisions become dominated by current market performance and therefore short term emotional apprehension.

The indices we use to measure index returns are as follows:

Past returns are no guarantee of future performance.

The information provided in this blog is not intended to be a substitute for professional advice. You may seek appropriate personalised financial advice from a qualified professional to suit your individual circumstances.