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What a difference a quarter makes!

SuperLife's average return (after-tax and expenses) for NZ Shares over the five years to 31 December 2012 was 3.9% a year. Three months later (at March 2013), the five-year average return was 8.6% a year. The difference is significant. This reflects the impact of dropping the quarter to 31 March 2008 (-15.0%) from the five year period and adding the quarter to 31 March 2013 (5.8%).

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This highlights the need to understand how the pattern of quarterly returns can impact the longer term average. The quarters where returns are very low or very high have a significant impact on the average. This is especially so where these quarterly returns are at each end of the period measured.

The average quarterly return of the NZ share market, over the last 25 years, was 1.6% after tax. The pattern of the net quarterly returns around the average over the last 25 years was:

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The pattern of quarterly returns shown in Chart 2 indicates that returns below 115% are rare, but not unusual or unexpected. Also, the chart shows that:

  • The returns over a quarter are often negative (about 35% of the time), but mostly they are positive;
  • Sometimes, about 10% of the time, it is very negative (i.e. less than -10%)
  • It is not predictable when the negative returns will happen. Trying to time the market can therefore increase the risk.

The New Zealand shares Pool was not the only sector to have materially different five-year average returns between December and March. Each of the property and share sector Pools had similar experience.

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The March 2008 quarter as one of the early quarters in the period known as the sub-prime crisis that led on to the global financial crisis (GFC). It was a quarter that saw a dramatic fall in property and share asset values and the start of a decline in the share markets which lasted until March 2009. Since 2009, markets have generally recovered, but have yet to return to their pre-crisis levels.

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The recent experience highlights the importance of not making decisions on the basis of past performance in isolation. A lot can happen in a quarter. Making investment decisions based on the assumption that recent returns (bad or good) will continue is unlikely to be a sound basis for decisions.