People are still fearful to invest in companies (even though they play a significant role in your future wealth)

In our initial consult, we’ve noticed some common questions being asked.

These are:

• • Is now a good time to invest?
  • How can I dollar-cost average a lump sum of cash?
  • What’s going to happen to share prices when the RBA starts to raise interest rates?

Questions like these make us realise that there is still an underlying fear of investing in the great companies of Australia and the world. It’s not surprising, when you consider events like the 2009 GFC, when the markets dropped significantly. Since then, we’ve had a very good run – but anyone who was invested back then will remember that time period well, and not for good reasons.

In the last quarter of 2007, the market peaked – and then started to drop. And it continued to drop for a very long time after that. By September 2008, nearly a year after it started, the great companies were down by 26%. But that wasn’t close to being the end. In the third quarter of 2008, the markets fell a further 14% – in just one week. And six months on, when we finally reached the inevitable bottom, another drop of 17% took us to a total of –57%.

During this time, Michael was a financial adviser, and remembers how all hell broke loose. People he didn’t expect to panic, panicked – and sold their shares for cents on the dollar. This meant that not only did they lose money on the shares they owned, but they also missed out on the next 13 years of return on the largest companies of the world.

Of course, the media doesn’t always help, making comments like ‘it’s different this time’. But it’s never actually different; only the cause of the drop is different. And, in this state of panic, when everybody is selling and not many are buying, the price of shares only has one place to go – and that is down.

Compared to this, the 2020 fall in the market due to the COVID-19 pandemic was miniscule. It was the fastest drop of all time, but also the fastest recovery – people didn’t have time to panic over the 37% fall. It was an entirely different scenario to the 2009 GFC.

Here’s what we know for certain:

• • Owning the great companies of Australia and the world is one of the best ways to ensure that you don’t run out of money during a 30-year retirement. Over the last 30 years, the S&P 500 (the largest 500 companies of the US) is up ten times from where it started. And yes, the GFC was right in the middle of that. Comparatively, the cost of living has increased by roughly 2.3.

• • If you panic during a deep and protracted drop (such as the GFC) and you sell your great companies for 43 cents on the dollar, you’re not coming back from that mistake in a hurry – and you will also miss out on future returns.

There really is no comparison between the 10%+ return of the share market over recent years and having money in a term deposit where the return is currently 0.35%, despite people thinking this is the ‘safe’ option.