Chart of the week: Should investors fear equity market highs?

Australian equities recaptured pre-crisis highs this week after an excellent year thus far for share market returns. This has led some to question whether they should retain their equity market exposure and stay invested with the market at an all-time high. Although it was over a decade ago, the financial crisis remains fresh in many investors’ minds. An investor that had bought at the 2007 peak suffered a 53% drawdown by the time the S&P/ASX 200 finally troughed in 2009. Many are obviously keen to avoid this experience.

However, an analysis of S&P/ASX 200 monthly total return data since 1992 suggests that the chances of an investor experiencing a bear market are probably smaller than many think. Assuming that an investor bought at a random point in time:

  • In 29% of cases, an investor did not see their initial investment (including dividends) turn negative at any point in the future;
  • In 58% of cases, an investor did not see their initial investment (including dividends) suffer a drawdown of more than 5%;
  • In just 11% of cases an investor experienced a “bear market” of a fall in value of their initial investment (including dividends) of more than 20%.

Out of 325 monthly observations since 1992, 108 were market highs, like today. What was the investor experience if an investor had bought at one of these all-time high points in the S&P/ASX 200 Total Return Index? The statistics are similar:

  • In 29% of cases, an investor did not see their initial investment (including dividends) turn negative at any point in the future;
  • In 55% of cases, an investor did not see their initial investment (including dividends) suffer a drawdown of more than 5%;
  • In 17% of cases an investor experienced a “bear market” of a fall in value of their initial investment (including dividends) of more than 20%.

Investing at an equity market high suggests there is a greater chance that an investor may experience a bear market. But the inverse is also true: 83% of investors did not experience a bear market after investing at an all-time market high. This makes sense, as for every Asian Crisis, Tech Boom, or GFC, there are far more years where investors are rewarded with good total returns from the Australian equity market.

This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”).  Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity International.

Investments in overseas markets can be affected by currency exchange and this may affect the value of your investment. Investments in small and emerging markets can be more volatile than investments in developed markets.

This document is intended for use by advisers and wholesale investors. Retail investors should not rely on any information in this document without first seeking advice from their financial adviser. This document has been prepared without taking into account your objectives, financial situation or needs. You should consider these matters before acting on the information.  You should also consider the relevant Product Disclosure Statements (“PDS”) for any Fidelity Australia product mentioned in this document before making any decision about whether to acquire the product. The PDS can be obtained by contacting Fidelity Australia on 1800 119 270 or by downloading it from our website at www.fidelity.com.au. This document may include general commentary on market activity, sector trends or other broad-based economic or political conditions that should not be taken as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be taken as a recommendation to buy, sell or hold these securities. While the information contained in this document has been prepared with reasonable care, no responsibility or liability is accepted for any errors or omissions or misstatements however caused. This document is intended as general information only. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. Reference to ($) are in Australian dollars unless stated otherwise. 

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