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If I invest in shares, I expect that the value of my investment will go up and down. Therefore, when it goes down, why do I panic and want to switch to cash? When you invest in shares, it is important to have a long term focus and to understand why you invested in shares. If this reason remains valid, reacting to short-term share market movements, such as those that have occurred in the last three months, is likely to be detrimental to your long-terms returns.

Shares are often negative

Seeing negative returns from shares is not new. It is well known that short-term, share markets can go down and the timing and size of the down, is unpredictable. This is why shares are for the long-term protection of wealth. Over the last 20 years (1 July 1991 to 30 June 2011), shares have gone down 44% of the time. The pattern of the movement of the value of NZ shares over each three-month period in the last 20 years is shown in Chart 1.

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Chart 1 shows for each three month period when the sharemarket was positive (above the line) or negative (below the line). As can be seen, the sharemarket has been negative (i.e. down), 44% of the time, (35 quarters out of the 80 quarters). Overall however, while is has been volatile quarter to quarter, it has been positive for the full 20-years period.

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While the capital value of shares in the NZ share market has been positive over the 20 years, it has not been for all 10-year periods within the 20 years. The last few periods have been negative.31 aug graph3.bmp

The previous three charts have all exclude the impact of dividends. When we buy shares, we also receive the dividends the companies pay. Despite the volatility in the underlying value of the shares, the dividends are quite stable. Chart 4 below plots the gross annual dividend yield paid on NZ shares over the last 20 years. The dividends have averaged 6.6% a year but ranged between 5% and 9%.

 

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Conclusions

Shares have in the past gone up and down on a frequent basis. Going down over a quarter is common. While the reasons for the “downs” vary from one down to the next, and the timing is unpredictable. In each case, the market has gone on to recovery and in the process companies have continued to pay dividends. Dividend income and long term capital growth make shares attractive, but only for a genuine long-term investor.

Legal stuff

Legal stuff This article is a general investment commentary. It should not be considered as being personalised financial advice. Members should obtain appropriate financial advice from a suitably experienced Authorised Financial Advisor, before making any investment decisions. Only an Authorised Financial Advisor can legally take into account the person’s personal circumstances. SuperLife does not give personalised financial advice.