Andrew Gawith: Noughties decade from hell for shares

This has been the decade from hell for share investors. Photo / NZ Herald

Opinion

The last decade has been one of the worst for investors in the world's largest stockmarket.

The United States sharemarket as measured by the widely used S&P 500 index started the decade on a high of 1527 on March 24, 2000 - the height of the tech boom.

Over the following 2 years, helped by the terrorist attacks in New York, the S&P 500 fell by 50 per cent. And then it took the market around five years to regain the ground it had lost.

Most investors could be forgiven for thinking that was a once-in-a-generation convulsion.

But it wasn't.

A wilder ride was just around the corner.

The S&P peaked in October 2007 at 1565 - a whisker ahead of where it had been at the beginning of the decade, and incidentally the month KiwiSaver contributions began to be invested by providers.

The financial crisis took hold and sent stockmarkets, the banking sector and economies into one of the deepest slumps since the great depression of the 1930s. Central banks and governments scrambled to restore confidence to a finance sector that had gone into cardiac arrest.

Investors who had patiently waited for portfolios to gain some real value after the hammering they suffered at the hands of the tech crash were again staring at huge losses.

In just under 18 months the market retreated below the lows recorded earlier in the decade.

The S&P index bottomed at 676 on March 9, 2009, less than half the level it was at the beginning of the decade, thus underscoring what a truly awful decade it was for share investors.

Since March 2009 there have been impressive gains in share prices with the S&P up 66 per cent in US dollar terms.

It has been the quickest and, until recently, the biggest recovery in almost 100 years.

It's getting a bit like cricket - there's always some record being set.

You might think the magnitude of recovery would have restored battered portfolios.

But as students of mathematics know, percentage gains have to be bigger than the percentage losses to get back to where you were.

The S&P index today is still a whopping 30 per cent short of the peak it reached in 2007.

This has been the decade from hell for share investors.

They have absolutely nothing to show for the risks they took.

Indeed the drought has lasted for nigh on 12 years - the S&P index climbed over 1000 in 1998 and it is sitting at around 1100. That's a 10 per cent gain in nominal share prices (ignores dividends, fees and taxes) over a dozen tumultuous years.

It is tempting to think this is largely a US story.

It is in one sense, but what happens in America's markets has a big influence on the rest of the world.

Even the macho Aussie market took a big hit and although it has rallied it's still 31 per cent below its 2007 high point.

But spare a thought for Japanese investors who have experienced a longer and more horrific destruction of real wealth in their sharemarket than any other developed world investors.

The Nikkei has struggled back to around 10,500 from a low of 7000 at the depth of the financial crisis. But this index was over 40,000 in the late 1980s.

A key point from this data is while everything may pan out according to investing conventions - shares produce higher returns than bonds over the long term - the long term may be a long time coming.

A 50-year-old investor in 1998 could sensibly have chosen a growth mandate for her retirement savings scheme.

Now 62 her account is probably only as big as the contributions she has made, and possibly less once fees and taxes have been paid.

Over that particular period, and with the enormous advantage of hindsight, she would have been better to have saved for her retirement using a bank savings account.

Bonds, as measured by a global bond index expressed in US dollars would have delivered a 90 per cent return over the 2000s.

Does that mean longer-term investors should avoid the sharemarket?

No, but be prepared to wear some losses along the way and those losses may take a long time to work out of returns.

It's probably important to realise the price gains that push returns from shares above most other asset types can occur in relatively short bursts.

The past decade has been terrible for global investors and while markets may stagger for another year or two it would be unwise to believe that they won't eventually conform to their long-term conventions of shares outperforming bonds and cash.

* Andrew Gawith is a director of Gareth Morgan Investments. www.garethmorgan.com