In the long-term, are Equity Markets makers or destroyers of wealth?

English: Return on Investment analysis graph

English: Return on Investment analysis graph (Photo credit: Wikipedia)

Is the stock market a safe place in which ordinary Australians can invest?

How many Australians invest themselves directly into the stock-market? I really have no idea, but I guess it is less than half the population. There is a deeply entrenched wariness of the risks involved, being seen as a recipe for loosing, and not making money.

I’m sure the number is growing however. Quite expert financial news and guidance is now often featured in the media, and particularly  through the internet. Increasingly Australians have become disillusioned with the advice they have received and are taking more control of their own investments. to the point that now about 40% of superannuation money is held within self-managed fund vehicles..

Although it makes  sense to keep oversight and ownership of one’s savings for retirement, I do not think you have to do – it – all – yourself.  In the accumulation phase I considered that my role was to earn and save enough funds for my retirement as I could, and left the investment choices to full-time professional fund managers.

In retirement it has been different for me. With time on my hands, I have been able to undertake the study of technical analysis and apply what I have learned to the management of our own superannuation fund investment choices.

What is a reasonable investment return to expect?

The question often arises about how much money is adequate for one’s retirement needs, and what rate of return can be expected. Can retirees receiving 7-8% fully franked income from their blue chip investments expect to live on it, and keep the principal from being eroded too quickly.

The answer of course depends largely on how much has been  saved, and whether they can resist the temptation to spend down their capital on big-ticket items.

Despite being frugal, for most of us, it is pretty well mission impossible. Dividend flow may be unreliable from one year to another. Furthermore time usually erodes and not augments one’s capital.

Those investment advisers who reasonably argue in favour of investing in equity markets for long-term growth support their case with long-term charts of market indices.

I would contend that such charts are misleading. The variable not taken into account is the durability of the individual stocks within the indices. It might surprise investors to discover how few of them are still around twenty years, or even ten years later.

There is a constant attrition of stocks whose time has passed. Investors rarely regain what they have lost, but have to stomp up fresh capital for the latest IPO. The amount companies seek to raise increases with inflation, accounting for some of the steady increase in the market indices.

The chart looks impressive but fails to take into account how many stocks with declining market capitalization have been delisted and replaced by more highly capitalised start-ups.

Fortunately stocks are constantly being re-rated, and this volatility provides investors with opportunities to profit from capital gains in addition to the dividend stream.

Categories: Superannuation, Trading opinion

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