If you blinked in late March, you may have missed it.
But that was the time when global equity markets, having fallen by more than 35 per cent since mid-February amid the rapid spread of COVID-19, started to reclaim lost ground.
To be more precise, the exact day in Australia was Tuesday, March 24. After having recorded a sharp 4.4 per cent drop the day before, which took our market to its lowest point in the coronavirus crisis, the S&P/ASX 300 Index rebounded 4.2 per cent.
On Wednesday, March 25, our market had another strong lead following a massive 11 per cent overnight share market surge on Wall Street.
In a single day the Dow Jones Industrial Average gained 2,112.98 points, the largest daily point gain ever and the biggest percentage gain since 1933.
That huge gain was driven by the endorsement of the Trump government’s US$2.2 trillion coronavirus economic rescue package – the largest in US history.
Over successive days, the Australian market rose a further 5.5 per cent, and then by another 2.3 per cent – gaining almost 12 per cent over just three days of trading.
And, in the just over two months since then, the Australian share market has risen another 20 per cent, all up taking our market more than 30 per cent higher from its low point on March 23 (by last Friday).
Other major share markets, including those in the US, Germany, France and Japan, have chalked up even stronger gains of between 30 and 40 per cent over the same period. Although the UK market has lagged slightly, it is still up by about 25 per cent.
The unpredictability of markets
The point of detailing this chronology of market events is simply to demonstrate just how quickly share markets can move.
Picking the recent 4,359.60 S&P/ASX 300 Index low point of the Australian market on March 23 would have been sheer luck.
Which is why trying to predict what will happen next, and especially trying to time equity transaction decisions around unknown variables, is generally a dangerous tactic.
After having fallen so heavily during the latter part of February and early March as COVID-19 sparked widespread panic on investment markets, markets have posted very solid gains in a relatively short period of time.
The market rebounds have been fuelled by a wide range of factors, not the least being huge capital inflows into direct shares, exchange traded funds (ETFs) and other exchange-traded products, and unlisted managed equity funds.
For example, we saw more than $1.4 billion in net inflows into broad Australian market ETFs in March and April as investors moved to build diversified equity exposures to the domestic market. That positive money flow continued through May.
As always, however, what’s next for equity markets is totally unknown.
Ongoing health and economic uncertainties around the COVID-19 pandemic, rising US-China geopolitical and trade tensions, the civil unrest taking place across the US, and unresolved Brexit negotiations are just some of the factors feeding into the market’s underlying volatility.
After just having announced a 0.3 per cent decline in economic growth in the first quarter, the federal government has conceded that the Australian economy is in recession for the first time in 30 years.
Time (not timing) is everything
Interestingly, if we look back on investment returns over the past 30 years going back to 1990 (when Australia was last in recession), what emerges is a very clear picture of growth across all major asset classes.
The volatility in markets over time is also clearly evident, with the period including major downturns such as the sharp market correction that led to the prolonged Global Financial Crisis between 2007 and 2009.
Because the chart takes in data up until the end of this April, it also includes the most recent market falls and the very early stages of the current rebound.
The power of compound returns
The first observation from the chart above is that all asset classes on the chart have provided consistent growth over time, and some much more than others.
Taking the Australian share market, for example, up until the end of April it had delivered an average return of 8.3 per cent per annum over three decades, assuming all distributions had been fully reinvested.
Using a base amount of $10,000 invested back in 1990, a person holding Australian shares through an exchange-traded fund or managed fund tracking the whole market would have turned their initial holding into more than $113,000. That’s a total return of more than 1,000 per cent, excluding any fees, expenses and taxes.
A $10,000 investment into US shares over the same time frame would have returned 10.2 per cent per annum and be worth almost $190,000 using the same assumptions as above. That equates to a 1,790 per cent total return.
Even cash, the lowest-returning asset, would have delivered a total return of 5.3 per cent per annum and turned $10,000 into almost $50,000 with the benefit of compounding returns.
But, coming back to where this article started, the key is that trying to pick when to buy, and when to sell, is not the best strategy.
Those that did somehow pick March 24, or even March 25, as the turning point to buy into markets would have done extremely well. But long-term investors would already have been invested in the market anyway, before the big declines in February, so all they had to do was watch it rebound a month later.
Time in the market will invariably win over trying to time the market when it comes to achieving investment success.
What’s more important is staying the course with investments, irrespective of market movements, as that’s what will ultimately deliver the consistent compound returns over the long term.
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The information contained on this post has been provided as general advice only. The contents have been prepared without taking account of your personal objectives, financial situation or needs. You should, before you make any decision regarding any information, strategies or products mentioned on this website, consult your own financial adviser to consider whether that is appropriate having regard to your own objectives, financial situation and needs.
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