You only need to look at an all ords chart over 100 years to see that shares are, on the whole, a great bet. Well, technically the all ords has only existed for 28 years, but you get the picture.
As an investor, it’s easy to be caught up in the latest soothsayer predicting doom and gloom for the global economy, and like a broken watch, sometimes they’re right.
But if you’ve invested in the Australian market over the last 20-odd years, it’s likely that you’ve made a decent return — depending on what year you sold out.
Remember, past performance doesn’t indicate future gains — and you should consult a professional before investing in any financial product.
Chart from MarketWatch
More broadly however, investing in Australian shares has been a great bet over the longer term — with an average yearly return of ~13 percent since 1900.
In those 118 years, there have only been 23 negative years on record with the remaining years making positive returns.
By weight of return, you have a 55 percent chance of a return between 0 and 30 percent in any given calendar year.
In fact, it all works out to be an annual rate of return of around 13 percent.
To give you an idea of what this looks like in dollar terms, if you had $1 in the market in 1900 and were to cash out today, you would be sitting on a pretty $1.8 million thanks to the twin miracles of compound interest and inflation — although it should be noted that this isn’t a perfect calculation.
However, complicating matters is that before 1980 there was no ‘all ordinaries’ index to speak of — as the Australian share market was actually a series of state-based markets.
The earliest stock exchange was opened in Melbourne in 1861 as a way to fuel to the gold boom in the region that the city was effectively built on.
Other cities soon looked at the success of the market in Melbourne in stimulating economic activity and decided to follow suit — with Sydney first to follow 10 years later with its own exchange, followed by regional exchanges in Hobart, Brisbane, Adelaide, and Perth.
It was only in 1937 that an attempt to pull the disparate markets into the one overarching exchange was made with the Australian Associated Stock Exchanges (AASE) formed — which had representatives from all state-based exchanges.
But it would take another 50 years for the Australian Securities Exchange as we recognise it today to be formed, with the all ords following on.
It’s why pre-1987 data can be problematic to look at when trying to compare data.
However, the broad trends remain in place — the market always trends up, and almost always above the rate of inflation.
But, of course, you probably don’t have 118 years to stick around and realise the miracle of compound interest.
But the fact the market, through turmoils of the great depression and the GFC has continued to return an average of about 13 percent per year is a near miracle — and it’s underpinned by a couple of fundamentals.
More people, more money, more technology
There are, indeed, moments in time where markets go down — and this article shouldn’t be read as ‘markets will always go up’.
Instead, this is a ‘markets will always trend up over the longer term’.
It’s a subtle, but very important difference.
While the all ords has indeed gone up exponentially over the past 100-odd years, there have been periods where investors have been hurting.
If you had the unfortunate sense of timing to invest in the Australian market in November 2007, you haven’t made your money back yet. In fact, you’ve lost 4.45 percent so far.
If you invested in March 2009 however, just over a year later, you’ve more than doubled your money with a return of 106.5 percent to the current day.
Instead, what we want to point out is that the market, to this point, has trended upward — and many of the factors that marked that rise remain in play.
Those can broadly be split into:
- More people
- More technology
- More money
This one’s a bit of a no-brainer.
As society has set up a consumer model, adding more people to it adds more consumption.
Given every company on the planet is either creating a good or service to trade to a person and not a sophisticated AI (at least not yet), the growth of the worldwide population is a good thing from an economic point of view.
It’s why immigration and migration is generally read as a good thing if it leads to more participants in the economy.
Given Australia’s population has grown from 4 million in 1900 (driven by the gold boom in Victoria) to upwards of 26 million today — Australia’s companies have had a growing base of consumers to sell to.
As the population has increased and access to education has increased exponentially since the invention of the Gutenberg Press, there has been a greater chance of innovative ideas springing forth from the mind of any one individual.
That’s important, as technology leads to increases in productivity which leads to sales, which leads to returns to investors and so on and so forth.
As we’ve gone on, we’ve become even better at re-inventing the wheel — leading to productivity gains.
There’s a fairly famous book by the name of Superintelligence, wherein author Nick Bostrum attempts to put some numbers around it.
Before agriculture, in early human history, it took one million years for the population to generate the productivity in gathering food in order to sustain an extra one million people.
By 5000BC, when agriculture became a thing — that growth took just two centuries.
Post industrial revolution, this growth takes a grand total of 90 minutes.
It’s a broad measure, but more technology leads to more productivity, which leads to more profit.
Technology has made it more cost-effective to produce products or services, and also grown the amount of people available for companies to sell their products or services to.
This, in turn, has created more money — with central banks around the world printing more money to keep inflation caused by increased demand in check.
However, it’s another technology which has arguably increased the pool of capital available to invest in companies — the digitisation of money.
As the settlement of trades became more about the click of a button rather than the chauffeuring of large amounts of cash across town or procurement of promissory notes, the available pool of capital increased.
No longer was it virtually impossible for a retirement fund in Canada to invest in a pipeline company in Australia, for instance.
Why the market has trended up
Notwithstanding events such as the Great Depression or the GFC, the market has generally trended upwards.
That isn’t a guarantee that it will continue to do so, and there are predictions that the advent of technology will lead to a more volatile market in either direction.
But the fundamentals which got us to this point, by and large, remain in play.
We keep on adding people to the population.
We keep on inventing new products and services, and become even more effective at delivering those products and services.
As a result, more money flows into markets.
You only need to look at an all ords chart over 100 years to see how we got here.
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