This article was published on 25 January 2005. Some information may be out of date.

How to cope with the topsy turvy share market

The value of worldwide shares in a certain industry grew more than 52 per cent in the year ending last October. Why didn’t we hear more about it?

A clue might lie in the fact that the industry was information technology — infamous for its volatility.

Huge growth rates are not unusual for IT. Starting with the year ending October 1997, annual returns for the IT sector of the MSCI world index, in US dollars, were 26, 46, 58 and 93 per cent.

If you had invested $10,000 in October 1996, it would have been worth more than $56,000 by October 2000.

Not even houses in Wanaka grow at that rate!

The only trouble was what happened next: losses of 61, 10 and 36 per cent in the following three years. By October 2003, your investment would have dropped back to $12,700. And if you had entered the IT market later, and missed some of the early gains, you would be facing a loss.

Despite last year’s great result, then, many investors are steering clear of IT shares.

But information technology is not the only industry to be wary of. While others aren’t quite so volatile, their fortunes still vary widely year on year.

The MSCI index is divided into ten broad industry groups. No fewer than five of them reported the highest returns in at least one year in the last eight: consumer staples, financials, IT, materials and telecommunications.

Only one of those, financials, didn’t also come last in at least one year.

What’s more, consumer staples made the move from last to first in just one year, and IT did the same in reverse, moving from first to last in just one year.

Nor are the other five industries exempt from ups and downs. The top three industries in the year ending October 2003, energy, health and consumer staples, were the bottom three a year later.

It’s topsy turvy world in the share market.

The trouble with pointing all this out is that it could put you off investing in shares. And that would be a pity. Average returns on shares are the highest of all the major asset groups.

So how can you invest in them and reduce your volatility? There are two ways:

  • Invest in a wide range of industries, or in a fund that does that for you.

    There’s no denying that some years are bad for all industries. In the year to October 2003, the range of industry returns was minus 16 to minus 36 per cent.

    And some years are good for all industries. The following year, the range was plus 20 to plus 56 per cent.

    Frequently, though, one industry does appallingly while another soars.

    Ranges of industry returns in the eight years include: minus 10 to plus 58 per cent; minus 61 to plus 16 per cent; and minus 21 to plus 93 per cent.

    Because of the cancelling out of losses and gains, movements in the whole MSCI index are much less volatile than in industry sectors. The same is true of the New Zealand share market, or any other market.

  • Invest over a long period.

    Over a decade or more, the good years almost always outnumber the bad.

    One of the worries about using the data above is that the returns are unusually gloomy because the period includes 2000 to 2003. Only about once in 25 years do world sharemarkets do as badly as they did over those three years.

    Even so, long-term investors who have the courage to stick with their international shares will do fine.

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.