Investing isn't for wimps
A recent MFS survey in the US found 40 per cent of people between age 18 and 30 agreed with the statement, "I will never feel comfortable investing in the stock market." We suspect the results would be similar in Australia.
Can you blame them? In a way, yes. Favouring cash, while refusing to touch shares, many trading at attractive valuations, is financial self-destruction - particularly for young investors who have decades before retirement.
One wild August
On the other hand, it's been a zoo lately. Since the beginning of August - 36 trading sessions – the S&P/ASX 200 index has either risen or fallen by more than 1 per cent on 24 occasions.
In the U.S., the average day in August saw the Dow Jones go either up or down 1.94 per cent. Over the past 30 years, that number has averaged 0.76 per cent. Viewed another way, out of the 360 months in the past 30 years, August was the sixth wildest. The trend is continuing in September.
This scares people silly. If you've been lulled into thinking that shares return 7 per cent to 9 per cent a year, watching a blowout like August makes you wonder whether you've been tricked.
This is especially true since the S&P/ASX 200 index has effectively gone nowhere for the past six years (although returns are positive when dividends are factored in). It's been worse in the U.S. - their share market has been stuck for a decade.
Never invest again?
If shares are supposed to provide good returns, and the past decade in the U.S. has been a flat line, and the past six weeks was an utter crapshoot, then why should you invest ever again? That's the attitude many in the MFS survey no doubt hold.
But there are reasonable explanations for all of it. Shares have logged dismal returns over the past decade because that period's starting point is the height of the dot-com bubble. In the U.S., if you use 1995 as a start date instead of 2000, shares have returned more than 9 per cent a year for the past 16 years. Not bad.
There's more to the frustration than that, of course. Investors have been told - nearly assured - that broad stock market averages return 7 per cent to 9 per cent a year. You read this in textbooks. You hear it from financial advisors. It's been ingrained in investors' minds as an expectation benchmark. Own shares, expect 7 per cent to 9 per cent a year.
Sadly for the “we like everything to be symmetrical” crowd, we've got news for you. The expected return isn't the return you should expect.
We're not crazy
This isn't as crazy as it sounds. Over very long periods of time, shares will earn respectable returns of 7 per cent to 9 per cent a year. But among individual years - even decades - those returns will be all over the map.
In the U.S., going back to 1928, annual share market returns have spent very little time around the 7 per cent-9 per cent range. While the average annual return indeed works out to 7 per cent, most years are either well above, or well below, that level.
Out of 82 years, just 14 have fallen into the range that many investors expect to earn. The other 83 per cent of the time, stocks were in some sort of wild bull or bear cycle.
This is simple stuff that most investors know in the backs of their heads, but it drives home a vital point that too often goes ignored: Building wealth - the kind of wealth you can really count on over time - can take glacial levels of patience.
It's never different this time
That isn't anything new. It's worked this way for centuries. Over a lifetime, you'll be tempted by incredible up years, and frustrated by agonising down years.
The trick is learning that the former doesn't mean you're a genius, and the latter doesn't mean you're being duped. Both are just what markets do. And both have to be accepted if you want to earn those magical 7 per cent to 9 per cent annual returns over time that we've come to expect.
Whether vowing to avoid shares forever is rational depends on how you look at shares.
Wimp free zone
If you view them as something that should produce stable, steady returns without much volatility - even occasional bouts of extreme volatility - then avoiding them might be wise. Warren Buffett once said that unless you can watch your stocks fall 50 per cent without becoming panic-stricken, you shouldn't be investing.
If, however, you accept that putting up with volatility is what allows shares to be the greatest wealth generator out of any asset class over long periods of time, then recent experiences shouldn't change anything.
Investing still makes sense. It just isn't for wimps.
Morgan Housel is a Motley Fool feature columnist. The Motley Fool's purpose is to educate, amuse and enrich investors. Are you worried about the state of the markets right now? BusinessDay readers can click here to request a new free Motley Fool report titled "Read This Before The Next Market Crash ".
This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.