2022 proved to be a volatile year for financial markets. The Russian invasion of Ukraine was accompanied by higher inflation, central banks tightening monetary policy, and a slowing of economic growth around the world. Against this backdrop, most financial markets finished the year lower.
As we head into 2023, there are some emerging signs that efforts to contain inflation have been starting to take hold, albeit at the cost of lower economic growth and possible recessions in some countries. In this economic environment, how can we best cope with investing in shares and other financial assets?
Volatility reduces with time*
Reviewing the historical performance of investment markets can provide some comfort that over the long run, investing in shares is typically a winning bet.
From 1900 to 2022, the broad Australian share market index (most recently the All Ordinaries Index) had 99 years with positive returns, and 24 years with negative returns. The average annual return over this period was over 11% per annum, far exceeding the returns from holding either cash or bonds.
Individual years exhibited widely varying returns, but as shown in the chart 1, the range of average annual returns over longer periods was much narrower. Using this All Ordinaries data set, it can be seen that over a single year, 90% of returns fell into the range of -14% to +44%. Over 3-year periods, this came down to a range of annualised returns of 0% to +24%.
{{< figure src="/images/chart-1-1.png" caption="Chart 1 - Source: Fiducian, ASX, marketIndex.com.au Disclaimer: Past performance is not a reliable indicator of future performance and investment returns are not guaranteed" >}}
Further to this, the longer that you hold shares, the higher the probability that you will generate a positive return (chart 2). Over the last 123 years, 80% of calendar years had a positive return, and 75% had a return greater than 5%. Over 4 year periods, annualised returns were positive 95% of the time, and after 6 years, returns were positive across the entire sample period. After 5 years, annualised returns were greater than 5% per annum about 90% of the time.
{{< figure src="/images/chart-2.png" caption="Chart 2 - Source: Fiducian, ASX, marketIndex.com.au Disclaimer: Past performance is not a reliable indicator of future performance and investment returns are not guaranteed." >}}
The risks of trying to time the market
One rule of markets is that they are generally forward-looking. Share prices (or prices for bonds or property) typically react well in advance if there is the expectation of tough times (or good times) ahead. The weak performance of markets in 2022 was due in part to expectations of a softening economic outlook for 2023, with the International Monetary Fund steadily lowering its growth forecasts over the past year.
History has shown that markets do not tend to wait until growth resumes a positive path before moving higher. Out of 13 recessions recorded in the USA over the last 100 years, on only two occasions did the markets hit their lows after the recession was over. In all other cases, markets began to rise before the end of the recession.
Further to this, retreating from markets after prices have already fallen can often result in missing a strong rebound in performance. Chart 3 looks at instances over the last 40 years where the Australian share market has fallen by more than 10% in a single year. When this has occurred, the subsequent average return for the following 12 months has been +16%, with positive overall returns in 72% of cases.
{{< figure src="/images/chart-3.png" title="Chart 3 - Source: Fiducian, ASX, marketIndex.com.au Disclaimer: Past performance is not a reliable indicator of future performance and investment returns are not guaranteed." caption="Chart 3 - Source: Fiducian, ASX, marketIndex.com.au Disclaimer: Past performance is not a reliable indicator of future performance and investment returns are not guaranteed." >}}
Fiducian working hard behind the scenes for you and producing results that speak for themselves
The Fiducian ‘Manage the Manager’ process involves the careful selection of underlying managers for each sector, so that for the diversified funds, including the Fiducian Balanced Fund, there are over 25 carefully selected individual investment teams actively managing your investments and responding to changes in the investment and economic outlook. This is in addition to asset allocation decisions made by the Fiducian Investment team that can alter the weighting given to different asset sectors and managers within these sectors according to the expected economic outlook at any given time.
Short-term volatility is not unusual in investment markets. But a longer-term perspective, accompanied by the investment oversight provided by the Fiducian investment team remains a strategy that should continue to generate positive risk adjusted returns over time.*
The benefits of this approach are clearly evident in the performance of the Fiducian Diversified Funds over time.* For the period ending 31 January 2023, the Fiducian Growth Fund was ranked 7th out of 168 funds over 5 years, and 2nd out of 151 funds over 10 years according to the Morningstar survey of multisector growth funds. Recent performance of the Diversified Funds has also been highly ranked, with the Fiducian Growth Fund ranked 6th out of 170 Funds for the 7 months of the current financial year up to 31 January 2023, the Fiducian Balanced Fund ranked 24th and the Fiducian Capital Stable Fund ranked 12th in its category.^