Stagnant market over last ten years

ymlam · 7 November 2009

I am new to the stockmarket and until recently have only make use of super funds quite blindly. Investment seminars always posted a rosy picture of the stock market but I really want to appreciate it better.

I looked up some of the major stock market indexes today. It shows, compared to 10 years ago in round numbers, that it has dropped marginally
10 years ago Now
DOW 11,000 10,000
FTSE 6000 5000
N225 18,000 10,000

I appreciate that many Asian market and Australian market had performed better, this seems like a stagnant market over 10 years. While there had just been a major recession, the market had started improving and I cannot see things being much better over the next year.

Does this contradict how everyone painted such a rosy picture? I know that these figures does not include dividends, but surely that does not come to much. Does the index measurement correct for inflation?

skyQuake · 7 November 2009

ymlam said:
I am new to the stockmarket and until recently have only make use of super funds quite blindly. Investment seminars always posted a rosy picture of the stock market but I really want to appreciate it better.

I looked up some of the major stock market indexes today. It shows, compared to 10 years ago in round numbers, that it has dropped marginally
10 years ago Now
DOW 11,000 10,000
FTSE 6000 5000
N225 18,000 10,000

I appreciate that many Asian market and Australian market had performed better, this seems like a stagnant market over 10 years. While there had just been a major recession, the market had started improving and I cannot see things being much better over the next year.

Does this contradict how everyone painted such a rosy picture? I know that these figures does not include dividends, but surely that does not come to much. Does the index measurement correct for inflation?

I beg to differ, dividends account for a very large portion over the long term. See ASX accumulation indices. 5% divvie yield over 10yrs is 62%.
Index measurements do not adjust for inflation.

Knobby22 · 7 November 2009

skyQuake said:
I beg to differ, dividends account for a very large portion over the long term. See ASX accumulation indices. 5% divvie yield over 10yrs is 62%.
Index measurements do not adjust for inflation.

In Australia dividends count for a lot as stated above.
In the US there dividends are generally a lot smaller and considered less important.
The USA stock market has performed less well due to the way companies there are managed. They have lost their way. It will be interesting to see if they can reinvent themselves in the short term.

Australian management generally is not a lot better however we have better regulation and more powerful public that can influence, make accountable and remove boards. Alos we are more outward looking to to our size and where we are near Asia.

Julia · 7 November 2009

I can see why you would draw the conclusions you have when looking at ten year comparisons, but to do so is to ignore the money making peaks and troughs during that period.

Why don't you bring up charts of the major indices for shorter periods, e.g. look at five years, two years, one year, and that will clarify for you how much money you could have made if you'd bought into uptrends and sold into downtrends, or alternatively gone short when the market fell.

And I'm only considering capital gains, completely ignoring the input of dividends and franking credits.

Wysiwyg · 7 November 2009

Julia said:
Why don't you bring up charts of the major indices for shorter periods, e.g. look at five years, two years, one year, and that will clarify for you how much money you could have made if you'd bought into uptrends and sold into downtrends, or alternatively gone short when the market fell.

And I'm only considering capital gains, completely ignoring the input of dividends and franking credits.

You make it sound so simple Julia.

ymlam · 7 November 2009

skyQuake said:
I beg to differ, dividends account for a very large portion over the long term. See ASX accumulation indices. 5% divvie yield over 10yrs is 62%.
Index measurements do not adjust for inflation.

How then do you explain that the index seems stagnant? This is especially so if index measurement do not adjust for inflation. The figures can be found in Yahoo finance so I assume it is accurate.

This is not to challenge anyone but to try to understand. I believe that average yield is about 5 to 6% as well, so something does not add up.

ymlam · 7 November 2009

Julia said:
Why don't you bring up charts of the major indices for shorter periods, e.g. look at five years, two years, one year, and that will clarify for you how much money you could have made if you'd bought into uptrends and sold into downtrends, or alternatively gone short when the market fell.

I thought the considered wisdom is to look at the long term. In the short term you may be looking at a bull market or bear market, like in the last two years. This can be a distortion.

Julia · 7 November 2009

skyQuake said:
I beg to differ, dividends account for a very large portion over the long term. See ASX accumulation indices. 5% divvie yield over 10yrs is 62%.
Index measurements do not adjust for inflation.

Skyquake, realistically 62% over ten years isn't much. This is my objection when people say they buy stocks for the dividend and don't worry too much about the capital.

Wysiwyg said:
You make it sound so simple Julia.

I don't mean to sound glib, Wysiwyg. Sorry.
But there have been plenty of opportunities to grow your capital in the last ten years. If you bring up charts as suggested earlier, you will see what I mean, I'm sure.

skc · 7 November 2009

ymlam said:
I am new to the stockmarket and until recently have only make use of super funds quite blindly. Investment seminars always posted a rosy picture of the stock market but I really want to appreciate it better.

I looked up some of the major stock market indexes today. It shows, compared to 10 years ago in round numbers, that it has dropped marginally
10 years ago Now
DOW 11,000 10,000
FTSE 6000 5000
N225 18,000 10,000

I appreciate that many Asian market and Australian market had performed better, this seems like a stagnant market over 10 years. While there had just been a major recession, the market had started improving and I cannot see things being much better over the next year.

Does this contradict how everyone painted such a rosy picture? I know that these figures does not include dividends, but surely that does not come to much. Does the index measurement correct for inflation?

There are 2 simple ways to look at it.

1. Take a longer term investment view, and look at a 30 year chart. You will find the index has been going up quite nicely. Plus you get some dividends...

2. Take a shorter term trading view, in which case you need to look at the absolute highs and lows of the index, and realise that there are ample opportunity to make money if you know what you are doing.

BTW, the good people at investment seminars have a vested interest in getting you excited about the markets... so painting a rosy picture is sort of a given.

cutz · 7 November 2009

Hi ymlam,

You need to compare apples with apples, the two periods you're comparing are the last tech boom and the current ripper bear market. You would have to be pretty unlucky to only have bought the US index in 1999 and sold out this year, most long term investors buy over several decades, astute investors do their buying in bear markets.

So_Cynical · 8 November 2009

ymlam said:
I know that these figures does not include dividends, but surely that does not come to much.

In my portfolio i have 2 stocks returning a dividend yield of over 14% PA and another 2 at around 10%...your looking at the indexes so your looking at the slightly skewed averages.

Average investment plans will give u average returns....also timing is a factor, have a look at the Gold chart, and about 6 months ago u could of said, gold has gone nowhere in 2 years (as many in this forum did say) 890 then and 890 now...6 months later its breaking through 1100 up over 20%

Tradesurfer · 8 November 2009

Those using technicals(charts) to compliment their fundamental ideas or purely used charts have done much better. They also were able to take advantage of the down side.

One of the misconceptions around technical analysis and chart trading is that it is only for those short term traders or hyper active traders.

Those having a longer term view might use longer term charts such as weekly or monthly.

On the monthly charts, overlaying something as simple as a 20 period moving average would have gotten investors out of the market not at the top but well before the lows and even provided short investing opportunities.

Just something to think about.

condog · 8 November 2009

You hold the right stocks long enough and they end up paying you each year almost as much as they cost you 10 -15years ago.....

eg CBA ANZ, MQG (formely MBL) etc

Secondly this does not take into account that the dividend stream is tax free due to franking credits......

Give me shares anyday....

ymlam · 8 November 2009

Thanks for all the response. Let me point out that I am not challanging the fact that you can make a lot of money in the stock market. In any oscillating market there are obviously plenty of opportunities.

I am querying the wisdom that the stock market is one of the best long term investment, and many are encouraged to contribute significantly to super and managed funds in recent years in Australia. I take the point that 30 years is a longer term and may present a better long term view, but 10 years should be long term by most people standard. Most investment seminars ask you to look at the long term, a 5 to 7 years period at least, so 10 is not unreasonable.

I am approaching it from a long term and diverse portfolio perspective. Looking at it from a 30 years perspective is a lot more complex. How things have changed over 30 years is another discussion itself, massive inflation over a period is one of them. In any case, 30 years ago most would have a lot less to invest unless they are well over 60.

alphaman · 8 November 2009

My moving 120-month ROC chart on S&P500 shows several holding periods where you get capital loss: the 10 years ending 1938-1941, 1946-1947, 1974-1975, 1977-79, and now.

The capital losses in the 40s and 70s were relatively minor. If you add in dividends you might get positive nominal return overall. Not sure about real returns.

Capital loss peaked at 40% so far in this GFC. During (or after?) the Great Depression it peaked at 64%. I doubt dividends would make up for it.

I think the bottom line is even if your holding period is 10 year, timing still matters. It makes a huge difference.

bunyip · 8 November 2009

ymlam said:
I thought the considered wisdom is to look at the long term. In the short term you may be looking at a bull market or bear market, like in the last two years. This can be a distortion.

The 'considered wisdom' is changing, and so it should, in view of the research showing that there are more losers than winners among stockmarket players.

Julia is right....the way to increased profits from the market is to plan your strategies around the various bull and bear cycles within the longer term.

Julia · 8 November 2009

ymlam said:
I am querying the wisdom that the stock market is one of the best long term investment, and many are encouraged to contribute significantly to super and managed funds in recent years in Australia. I take the point that 30 years is a longer term and may present a better long term view, but 10 years should be long term by most people standard. Most investment seminars ask you to look at the long term, a 5 to 7 years period at least, so 10 is not unreasonable.

You're quite right in the above. It's why so many people who naively trusted Fund Managers to actively look after their investments in the recent downturn are now finding themselves continuing to work instead of retiring.
And why hopefully more people will decide they need to take more interest in their own financial situation by understanding the importance of timing.

alphaman said:
Capital loss peaked at 40% so far in this GFC. During (or after?) the Great Depression it peaked at 64%. I doubt dividends would make up for it.

I think the bottom line is even if your holding period is 10 year, timing still matters. It makes a huge difference.

Exactly.

ymlam · 8 November 2009

alphaman said:
My moving 120-month ROC chart on S&P500 shows several holding periods where you get capital loss: the 10 years ending 1938-1941, 1946-1947, 1974-1975, 1977-79, and now.

interesting! Would your analysis show how often in the past 10 or 20 years how often would the gain be more than a fixed bank deposit; I expect about 6%.

I have always assume over the long period you would do better than fixed bank deposit; if not why bother! The lesson here seems to be to do exactly that unless you can pick the trend.

condog · 8 November 2009

This is a healthy debate if for no other reason then for some to discover

No one strategy works all the time
No one strategy suits every investor
No one period of time is reflective of any other period of time...

bunyip · 8 November 2009

condog said:
This is a healthy debate if for no other reason then for some to discover

No one strategy works all the time

The belief that no one strategy works all the time stems from the fact that most market players only play the long side of the market, and ignore the short side.

The 'top down' approach works consistently across pretty much all market conditions, due to the fact that it plays not only bullish markets, but also flat and bearish markets.

The 'top down' approach starts by analysing the trend of the overall market, then the trend of each sector of the market, then the trend of stocks in the strongest and weakest sectors.

The idea is that when the market is bullish, you find the strongest sectors of the market, and the strongest stocks in those sectors. You then focus your buying in these outperforming stocks.

When the overall market is bearish, you find the weakest sectors of the market, and the weakest stocks in those sectors. Then you focus on shorting those underperforming stocks either by shorting the stocks directly, or by using Put Options or CFD's.

When the overall market is flat, there's usually one or two sectors that are nevertheless bullish or bearish, offering good opportunities for longs or shorts in the strongest/weakest stocks within those sectors.

Since markets at any given time are either bullish, bearish or flat, the top down approach finds profitable trading opportunities under all market conditions - but only if you're willing to play the short side as well as the long side.

The key is in having a simple and efficient method of zeroing in on the strongest and weakest sectors of the market, and the strongest and weakest stocks within those sectors.

I'm not saying it's the holy grail and it's certainly not the only approach you can use. But it's an approach that works irrespective of market conditions.

Stagnant market over last ten years

ymlam

skyQuake

Knobby22

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Julia

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Wysiwyg

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ymlam

ymlam

Julia

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skc

Goldmember

cutz

So_Cynical

The Contrarian Averager

Tradesurfer

condog

ymlam

alphaman

bunyip

Julia

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ymlam

condog

bunyip

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