"The only thing new in this world is the history that you don't know."

7 April by Lifetime

"The only thing new in this world is the history that you don't know."

Harry Truman, the 33rd President of the United States had a profound love of history. Truman looked to history for guidance on many of the issues he faced during his presidency, including the establishment of the United Nations, the ending of World War II, the economy, civil rights, the recognition of Israel and the Korean War. Although each of these issues were “new”, in Truman’s view they were also “old”. Truman reflected on history to help make better decisions in the present.

In our day, the current Coronavirus pandemic is new, but a crisis having an impact on share markets is not new at all.

The table below shows all the S&P 500 downturns of more than -10% (month end to month end) since WWII, and their subsequent recoveries.

The table above has a lot of numbers. But they are more than just numbers.

To the keen eye, the table summarises history. For example, it includes the period of the oil embargo of the 1970’s. It includes the runaway inflation of the 1980’s. It includes the share market crash of 1987. It includes the Global Financial Crisis just over a decade ago. These have each been amongst the largest threats to our economic existence in living memory. And it’s all captured in the table above. 

 

"The next generation never learns anything from the previous one until it's brought home with a hammer…. I’ve wondered why the next generation can’t profit from the generation before, but they never do until they get knocked in the head by experience."

Given the wealth of historical information represented above, what can we learn? Well, here are a few important observations:

  1. In the past we’ve experienced events that have significantly impacted markets on average every five years. In other words, they are fairly common. If you plan to be an investor over the next 20 years and this average is maintained, you could reasonably expect to experience four more of these market downturns. 
  2. There’s never been a bad time for long term investors to buy into markets. Let’s say that you had the worst timing in the world and bought in at the peak of the market in September 2000 and sold at the low point in December 2018. You would still have more than doubled your money. 
  3. Since the end of WWII, the market has increased in value about 150 times. That’s 150x in about 75 years. Those 75 years effectively represent the living memory of the planet. You might ask yourself, how anyone could possibly lose money in this sort of market?  Yes, it would be hard. But those that did were probably trying to predict or avoid the downturns, but only succeeded in missing out on too many of the strong gains that occurred on either side of a downturn. 
  4. Markets recover fast. Although we can never pick the bottom of the market, the average return for the next 12 months following a low point has been positive 33% and over 3 years it’s positive 63%. These historical recovery rates should provide great encouragement to all investors to stay in their seats in a crisis.

For the investors who might be asking themselves, “Given all I can see throughout the history of capital markets, how should I respond to this latest drop in prices?”, this history is critical. It provides an important basis for making better decisions in the present.

Unfortunately, even though the history of financial markets is easily accessible, we are not always quick to embrace its lessons. Although a history buff himself, Truman expressed his frustrations of humans often being too slow to learn from the past.

Truman once told American author and novelist Merle Miller, "The next generation never learns anything from the previous one until it's brought home with a hammer…. I’ve wondered why the next generation can’t profit from the generation before, but they never do until they get knocked in the head by experience."

It's fair to say that many investors have now been ‘knocked in the head’ by experience, and some younger investors are going through this for the first time. But here’s hoping, despite Truman’s scepticism, that we can all profit from the generations before us and use our knowledge of history to help us make better decisions today.

 

Article by Ben Brinkerhoff, Consilium

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