Mark Lister, 1 July 2020

It’s easier than you’d think to make money from shares. In fact, as long as you follow two basic rules, history would suggest you’re virtually guaranteed to.

All you have to do is firstly be well-diversified (own lots of different shares), and secondly measure your success against an appropriate timeframe, ideally 10 years or more. Not exactly rocket science.

The diversification bit is easy. Any decent adviser you work with will drum that into you on day one (and probably every day thereafter), and if you’re a small investor there’s always an index fund to provide instant diversification.

Keeping your eye on the long game is definitely more difficult, especially when you’re in the thick of some short-term market turmoil. But it’s non-negotiable for any good investor, and if a decade ahead sounds too far away to think about, then shares probably aren’t for you anyway.

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The thing with financial markets is that the further ahead in the future you look, the more predictable things become. That’s the opposite of just about everything else in life, but a lot of things about markets aren’t very logical.

Long-term returns data on US shares is readily available, so let’s consider the post-war period. The average annual return since then has been 10.6 per cent (including dividends), and shares were up in 77 per cent of those 74 years.

Not bad at all, but the short-term variation has been huge. The best 12-month period saw a 59.5 per cent gain, and during the worst US shares fell 41.0 per cent (the former was in the early 1980s and the latter was in 2009).

But things are a lot less scary if we look at them in five-year investment timeframes. The proportion of positive returns for shares jumps to 92 per cent, the best per annum performance falls to 29.5 per cent and the worst to -5.9 per cent.

Move to 10-year blocks and investing looks simpler. Shares were higher 97 per cent of the time, the best annual return was 20.8 per cent over the period, and the worst a 3.6 per cent loss (which occurred in the 10 years leading up to the lowest point during the GFC).

Move to 15, 20 or 25-year holdings periods and not only does the proportion of negative returns fall to zero, but the spread between the best and worst examples narrows significantly.

The annual average return over all those periods is almost exactly the same as the original 10.6 per cent too. The only difference is that things become much more consistent, and far less volatile.

The results are similar for New Zealand. Looking at monthly returns going back to 1967, the average return has been 10.0 per cent per annum, and there’s never been a 10-year period where the market has fallen.

So there you have it. If you’re well-diversified and you maintain a sensible investment time horizon, history suggests you’re almost guaranteed to turn a profit.

Markets are impossible to predict over days, weeks, months or even years. But the likely returns you will get and the volatility you will have to suffer become much easier to see as we look further ahead.

A good share portfolio will just about always do well over the long-term, which is what most of us are investing for. The hard bit is keeping your cool and remembering that when the short-term looking more difficult.

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