This article was published on 23 January 2007. Some information may be out of date.

It’s the same old song

New data confirm the same old messages about share investing: hang in there, and diversify.

An analysis by SuperLife of the last 30 years shows that if a share market is performing badly, stick with it and it’s likely to get better pretty fast.

The New Zealand market, represented by the NZX40 index, delivered positive returns in 81 of the 120 quarter years — about two thirds of the time.

Let’s look harder at the 39 negative quarters. Eighteen of those were one-offs. The market went down in one three-month period but recovered in the next one.

Another 18 were double bangers. The market fell for two consecutive quarters nine times. Nevertheless, it recovered after each of those dismal six months.

Only once in the last 30 years did the New Zealand market fall for more than two quarters in a row. It fell for three quarters — starting July 1, 2002 — but recovered after that.

The offshore numbers are similar. Share returns — as measured by the MSCI unhedged international share index — were positive in 87 of the 120 quarters.

Of the 33 negative quarters, 20 were one-offs and eight were double bangers.

Again, there was just one time when the market fell for more than two quarters. This time, though, it was seriously bad news. The international market fell for five quarters in a row, starting January 1, 2002.

Keep in mind, though, that this happened only once in 30 years. And the market has largely recovered since then.

Over the long haul, shares in both markets have grown strongly.

On average, New Zealand shares have grown 16 per cent a year, including dividends, over the least 30 years, while international shares have grown 13.3 per cent a year.

The data also show how the New Zealand and international share markets interact.

Returns for were positive for both markets in 66 of the 120 quarter years.

What about the other, more worrying 54 quarters? In 36 of them — in other words, two thirds of the time — a fall in one market was at least partly offset by a rise in the other. Both markets fell in only 18 of the 120 quarters.

What can we learn from all this?:

  • Share markets are volatile. If you invest in shares or a share fund, expect the value of your investment to fall often.
  • It’s rare, however, for the market to keep falling. Hang in there, and things will usually come right fast. Even when it takes a while, it comes right in the end.
  • This volatility is why experts recommend that you don’t invest in shares if you need the money in the next few years, in case you end up having to sell when the market is down. Many say you should have at least ten years in hand.

    Adds SuperLife, “This is one reason why an investor, near retirement, should have a mix of cash for immediate expenditure, bonds for medium term expenditure and shares for longer term expenditure.”

  • Investing in both the New Zealand and international markets considerably reduces your risk. When one market does badly, there’s a good chance the other will do well.

Of course, the future might not be like the past. But when you look at share data over a period as long as 30 years — which will always include some bull markets and some bear markets — you can generally draw more accurate conclusions than from shorter periods.

As SuperLife puts it, “We see few reasons why positive and negative returns will not occur with the same sort of frequency in the future.”

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Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it.