The Australian share market made a remarkable comeback in the 20-21 financial year to record gains of more than 20 per cent after crashing in the early days of the coronavirus pandemic.
The benchmark ASX-200 finished down 10.8 per cent in the 2019-20 financial year – the worst full-year result since the GFC. It followed it up with a gain of more than 22 per cent in 2020-21.
But BDO Private Wealth Senior Consultant Peter Crump says the boom won’t last forever.
How do you explain the massive turnaround?
When the market reached its peak around mid-February in 2020, people were saying the market was at an all-time high and where is it going to go from here?
The economy was looking fairly buoyant but there’s always the possibility of an unknown event that has the potential to significantly influence the value of the holding for potentially a long period of time.
When everything started stagnating and closing down, there was no idea about how long it was going to stall the world economically as well as politically.
The share market can move quickly both down and up and you can’t just look back to the GFC and say that the market took a long time to recover from that fall and assume that is always going to be the case.
When the pandemic started, we had a fairly significant fall over a few months and then people believed it was going to languish at a low level for a long time and that turned out to be incorrect so people decided they needed to get back in.
What drives share markets around the world is generally not individuals, it’s big institutions who are making big plays in the market on behalf of their aggregated clients and that’s the source of whether the markets move up or down.
It’s no different to the large superannuation funds we have in Australia, they have large amounts of money coming through the front door in terms of the compulsory superannuation contributions, which need a place to go and that inflow of money was still occurring as well and the funds were obliged to invest it according to the instructions of their members.
Governments were also giving people money and the average person wasn’t undertaking the usual entertainment expenditure, whether that be world travel, domestic travel and those people who were working in an undisrupted way ended up having spare money and that potentially led to them investing it so it wasn’t a surprise that there was more money coming into the share market at that time.
People were buying expectations of improved profitability and there’s an element of hope and speculation in that.
Is this booming market likely to be sustainable?
You would probably only expect to see returns above 20 per cent a year about 5 per cent of the time in the way that you wouldn’t want to be seeing returns of minus 15 or minus 20 per cent.
The market was getting relatively heated and the whole world was changing economically.
If the market was overheated in February 2020 when world economies were unfettered in terms of their activity then you’d have to say that at the moment the market is at a relative high and shouldn’t expect to be increasing so much and potentially should be due for some adjustment.
The world is still not stable at the moment – we are very much on the brink of how to control the virus.
If you were to estimate where the market might go over the next 12 months then there’s a greater chance it will come down somewhat rather than go up or stay steady.
If people are watching the share market and looking to dip their toe in the water, is it a good time to get started?
Putting your toe in the water can still cause problems. If a person has spare cash, what would they otherwise want to be doing with that spare cash and why are they looking to invest it?
If they are looking to invest because they are bored and they want something to do then that is probably not the right motivation to be going into the share market.
It’s a medium to long-term investment and if they say ‘let’s try the market and see what the market does because something might go up in value’ well is that investing or is that speculating?
If people have spare money then my question would be, what do you want to do with that money and do you expect you might need that money in two years’ time?
Investing in the share market for a two-year term is not a sound process but if the money is spare and is likely to remain spare for at least a five or 10-year outlook then considering investing some of it into something that is likely to deliver long-term value such as the share market does present an opportunity but it needs to be money that is going to be spare and isn’t going to be required in the next few years.
Q: How does someone get started?
It comes down to the person’s confidence and understanding of what the share market is.
If you’re a novice investor, it’s going to be very hard for them to understand how to pick the right type of company.
It’s hard enough for the people who are employed by investment companies to pick the right company that’s going to grow in value as part of an overall portfolio, so how is a person sitting at their kitchen table at home going to get it right?
From that perspective, people can go to a stockbroker to seek advice on a portfolio that’s suitable for them, a portfolio that gives them some diversification and spread across a couple of types of businesses.
Alternatively, they can always go to the true and tried share that grandparents might invest on behalf of their grandchildren with a listed investment company.
If you do that, you are not just investing in one business, you are investing in a spread of businesses and you are investing in the Australia market as a whole by making a simple investment with an Argo or a Milton and that removes the risk of picking the wrong company at the wrong time.
An illustration of that is who would have thought investing in an airline could be a bad thing?
But for people who held Qantas and Virgin shares, for example, Qantas came through but Virgin lost all value so picking a particular company can lead to significant or a complete loss if you pick the wrong company at the wrong time.
In terms of brokers you can go to the simple brokers, which are just a broking service such as the online services that most of the banks have and are relatively inexpensive.
Or you could go to a stockbroker but that is really only likely to be cost-effective if you have a portfolio of some significant size because the brokerage the broker will charge in exchange for advice on the placement of the portfolio is likely to be fairly significant.
But if you want advice on setting up a portfolio and managing it over time and it’s going to be part of your “superannuation” that sits outside your superannuation so to speak then a broker would probably be a good place to start.
If anybody says they can pick the stock market, get them to write the prediction down and seal it in an envelope and open it in the future and you’ll see that most people are not able to do so.
There is no such thing as a certainty in the share market so you should invest in a way that makes you feel comfortable.
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