Shares are more predictable than you think

There’s a lot of good investment wisdom out there.

Ensure you’re well-diversified, stick to quality assets, don’t overtrade and keep fees to a minimum are but a few examples.

One of the simplest but most important, especially when it comes to shares (or any growth asset, for that matter) is to maintain a long-term view.

That can be difficult, especially during periods of uncertainty (which come frequently).

However, it really is non-negotiable.

If you don’t feel you can stick it out for at least five (if not ten) years, the sharemarket probably isn’t the right place for your money.

The thing with share investing is that the further ahead you look, the more predictable things become.

That’s kind of backwards compared to just about everything else in life.

We generally have a good idea about what we’ll be doing today, tomorrow or next week.

However, things get murkier as we look ahead months, and certainly years.

The sharemarket is the opposite.

It’s much easier to forecast the five or ten-year returns than predict where markets will go next month or even next year.

Let me a share a few numbers with you.

Since 1950, the annual return (including reinvested dividends) from US shares has been 11.4 per cent, and the market has been up in 57 of those 75 years.

That’s an impressive return and a solid hit rate (76 per cent) over several decades.

However, the short-term variations have been significant.

The biggest gain in a 12-month period was 60 per cent (that came in 1983), while the biggest decline was 41 per cent (during the GFC in 2008 and 2009).

That’s why nobody should be investing in the sharemarket with a one-year view in mind.

Things look a whole lot less scary if we group returns into 10-year holding periods, which is a much more sensible time horizon.

The proportion of positive returns jumps to 97 per cent, while the range of best and worst per annum performances narrows to 20.8 per cent and -3.6 per cent (which was at the absolute worst point of the GFC in 2009).

Move to rolling 20-year blocks, and share investing begins to look straightforward.

US shares have delivered positive returns 100 per cent of the time, the best per annum return over a 20-year period is 17.8 per cent and the lowest 5.0 per cent.

The results are similar for New Zealand shares.

Looking at quarterly returns for our headline sharemarket indices going back to the 1960s, the market is up 79 per cent of the time over 12 months.

Over that 60-odd years, the annual return has been an impressive 9.4 per cent.

However, the volatility can be massive over short timeframes.

The best 12-month return is a gain of 116.8 per cent, while the worst is a fall of 48.6 per cent.

Unsurprisingly, those big swings came during the wild west of the 1980s.

Thankfully, the domestic sharemarket has changed dramatically since then.

If we exclude the 1980s, the best 12-month return was 51.7 per cent and the worst was -35.9 per cent.

That’s still very volatile, so the lesson is the same as the US.

When we look at 10-year holding periods since the 1960s, the market has never been down.

This is the secret.

Maintain a sensible investment time horizon, and your chances of success will increase dramatically.

The returns you can expect will also become much more predictable.

A well-constructed share portfolio will always perform well over the long-term.

The hard bit is keeping that in mind when there is a long list of things to fret over in the here and now (and trust me, there always is).

It’s simple, but I never said it was easy.

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