“You shouldn’t buy stocks unless you expect to hold them for a very extended period and you are prepared financially and psychologically to hold them,……You’ve got to be prepared when you buy a stock to have it go down 50% or more and be comfortable with it, as long as you’re comfortable with the holding.” – Warren Buffet
An interesting finding was released by Rosenberg’s research based on Federal Reserve data that Americans who are nearing retirement age (55 years+) have 80% of their portfolios in equities. This has risen from 60% from the two decades previously.
I always look at the composition of industry funds to find out as a proxy what Australians are invested in given the industry funds large scale. It has always been a bugbear of mine that these funds (and plenty of retail ones as well) say that a “Balanced investor” can have a 70/30 or 80/20 growth and defensive asset split. I wasn’t the best student in English, but that sort of composition breakdown does not reflect a balanced position.
Let’s look at a very large Industry Fund (manages over $341 Billion) in Australia and the composition of its balanced option as of Sep 2024.
- Equities (Australian and International) – 58.4%
- Other Growth assets (PE, property and infrastructure) – 22.7%
This makes up a growth asset composition of 81.1%.
Is this a problem?
Not when the market is going up.
Well don’t markets always go up?…. NO!
In our lifetime, Exhibit A is the Nikkei (Japanese stock market). Now Japan is not a backwater economy it is the second-largest economy in the world. As can be seen from the graph below, it was a long wait to break even on the 1989 levels. Indeed most retirees don’t have a 35-year period of time to wait for such an outcome.
Yeah, but it was a one-off.
Well, no it was not. There have been periods where the US market has gone nowhere in nominal terms. Nominal terms do not allow for inflation and the effect it has. For example, $100 in 2025 buys considerably less than $100 did in 2000. It is essential that we discuss returns on a real basis NOT a nominal basis.
Please refer to a previous blog I did on inflation, and the need to discuss real returns: https://www.shartruwealth.com.au/insights/blogs/inflation-the-basics/
Let’s take a look at a specific example using the US share market.
In 1968 to 1982 interest rates went from around about 4% to a high of 20% over that period of time. It should be noted that over that time there was above trend economic growth in real terms with companies being a lot more profitable. This resulted in investors in the equity market achieving a return based on the price over this period of approximately zero in nominal terms and actually lost 70% in real terms. However, when you include dividends that were reinvested the real return over the period comes back to zero.
There have been other periods in recent times where the US market has not gone up in nominal terms (let alone real terms) such as 1987-1992 and 2000-2013. When you look at the last 100 years there have been more periods of longer duration where real returns have not been positive.
Equities don’t always win.
Article by: Rob Coyte, CEO, Shartru Wealth Management