Equity market observations
Overcoming short-term volatility for strong returns
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Significant wealth creation opportunity in the equity market
The S&P / ASX 300 Accumulation Index has returned over 7% pa over the last decade up to May 2020. If you had invested $100,000 in the 300 largest Australian companies in May 2010, it would be worth just shy of $200,000 today, despite the recent stock-market sell off, Brexit, Grexit and other major global events from the last decade. Considering cash interest rates are close to 0% globally, a return of 7% pa from investments in the 300 largest Australian companies with no other analysis is a decent outcome for the patient investor.
In order to achieve these returns, an investor would have endured significant short-term volatility and challenges. Just over half the months delivered positive returns, at an average return of 2.85%, but just under half the months delivered negative returns, at an average of -3.04%. Furthermore, the maximum negative returns are far more negative than the maximum positive returns. Another way of interpreting this data is that in any given day or month, an investor is more likely to experience positive returns than negative returns. However, if you do experience negative returns, you are likely to experience a bigger loss; the worst loss you will experience is much more severe than the biggest gains. Outlined in the charts below, the maximum monthly loss during this period was -21% compared to the maximum monthly gain of 9%. The maximum daily loss was -9.68% compared to the maximum daily gain of 6.86%.
S&P / ASX 300 Monthly Average Return (%)
S&P / ASX 300 Monthly Positive and Negative Return Frequency (%)
S&P / ASX 300 Top 5 Positive and Negative Monthly Return (%)
S&P / ASX 300 Top 5 Positive and Negative Daily Return (%)
Source: Bloomberg and analysis by ELMRI
On most days and months, investors are likely to experience small positive returns
On just under half the days and months, investors are likely to experience larger negative returns
The maximum loss will far exceed the maximum gain in any given day or month
In the long-term, investors are able to generate strong returns by investing in the stock-market
Once we understand these statistics, we are better equipped and encouraged to invest through short-term challenges and volatility, which is particularly important during times of crisis and uncertainty.
This note has been prepared by ELM Responsible Investments (‘ELMRI’) ABN 70 607 177 711 AFSL 520428, for Australian wholesale clients for the purposes of section 761G of the Corporations Act 2001 (Cth).
The information is not intended for general distribution or publication and must be retained in a confidential manner. Information contained herein consists of confidential proprietary information constituting the sole property of ELMRI and its investment activities; its use is restricted accordingly.
This note is for general informational purposes only and does not purport to be comprehensive or to give advice. The views expressed are the views of the writer at the time of preparation and presenting and all forecasts, assumptions, opinions, data and other information are not warranted as to accuracy or completeness and are subject to change without notice. This is not an offer document and does not constitute an offer or invitation of investment recommendation to distribute or purchase securities, shares, units or other interests to enter into an investment agreement. No person should rely on the content and/or act on the basis of any material contained in this note. Any potential investor should consider their own circumstances and seek professional advice.
ELMRI funds, its directors, employees, representatives and associates may have an interest in the named securities.
Past performance is for illustrative purposes only and is not indicative of future performance.