Let’s polish the crystal ball and answer when is the best time to invest?
We have all seen the share markets take a tumble in the last month and many of us have experienced either through your Kiwisaver scheme, or your investment portfolio. In an economic crisis shares are often the first asset to fall in value as they are one of the most liquid. In other words, they are the easiest to sell and people tend to look to safer investments such as bonds and fixed interest investments.
Property is a far less liquid asset. Investors may not need to sell at the moment. However, with property investment, usually an income is required to sustain it as borrowing is involved. Personal and business incomes have been hit and will continue to get hit depending on how quickly we can rebound. Commercial leases may reduce with the success of working from home. Businesses may reduce the physical space they need in commercial buildings. This may result in increased conversions to residential apartments. Although Airbnb income may have dried up, those properties may easily be converted to long term rentals. If these factors play out, it may mean there is an additional supply of long-term rentals and a fall in rent prices. Good news for tenants, no so good for property investors. Presently rents may still be coming in and mortgage holidays have been issued to give people time to grow their incomes again. This doesn’t mean property will get a free pass. The potential effects, if any, will be delayed. What that will look like will depend on sustainability of incomes and the strength of balance sheets (your net asset position).
Now we are seeing the share markets bounce. This is interesting as there really hasn’t been good widespread business news that has led to this bounce. This is a result of increased market confidence from governments around the world working to sure up financial markets and do what they can to provide cash to their economies. Individual companies are still going to have some significant challenges ahead, just ask Air New Zealand!!
Interest rates are set to remain low for some time. So shares are going to look attractive at discounted prices. Today, Sparks gross dividend yield is 7.37%*. That’s very attractive in the current market. It will take time to see what will happen with property. It is likely that we will see some discounted properties that may result in more attractive yields as well.
So when is the best time to invest?
The answer will depend on your personal situation and your risk profile. In absence of that though lets take a look at the charts below. The first chart looks at the ASX 300 index from 2001 to 2019. The light blue lines represent positive annual returns, dark blue negative annual returns and the red dots the intra year low point. The second chart looks at average returns in the US following market declines of 10%, 15% and 20%.
Past returns are no guarantee of future returns. However, the best time to invest was clearly in the ASX when it hit -45% in 2008. The last significant financial crisis. Job done, lets go home. If only it were that simple.
What these charts tell you is:
- Sharp dips don’t always result in negative years. Every year on the ASX from 2001 to 2019 experienced intra year declines ranging from -3% to -45%. Yet only 4 of the 19 years ended up in negative territory.
- Negative years were always followed by increases the following year that ranged from 15% to 38%.
- In America, after 5 years, the indexes delivered double digit returns higher than the long term average of 9.61%.
This tells us that the best time to invest is for the 5 years proceeding a significant market decline. There’s just one problem. No one knows when the low point in the market will occur. This is why chasing returns is futile. Usually it involves chasing unnecessary risk.
This is why understanding your situation, what you want to achieve, your goals, and your risk profile are so critically important. From there an advisor can recommend an appropriate investment strategy and a plan. Returns are important, but getting you to your goals is more important.
Disclaimer: The information in this blog is general in nature. You should seek personalised financial advice for your situation from an Authorised Financial Advisor.
* https://www.nzx.com/instruments/SPK 24/04/20
Charts were sourced from Dimensional Fund Advisors. https://us.dimensional.com/
- Posted by Isbister
- On April 24, 2020