The reality for investors is share markets have been on a record run for decades.
It’s very easy to get caught up in the hype whenever share markets hit record highs.
That was the case again last week as media coverage around the world celebrated global markets reaching new heights, in some cases incorporating images of stock exchange trading boards and smiling stockbrokers.
Record highs tend to make news, and it was certainly a good week on equity markets. The United States’ Dow Jones Industrial Average sailed through 41,000 points, the U.S. market’s broader S&P 500 Index broke through 5,600 points, and Australia’s All Ordinaries Index moved into record territory above 8,200 points.
While markets have since dipped slightly, so far this year (as at 23 July) the Dow Jones is up more than 7%, the S&P 500 by over double that (17%), and the All Ordinaries by about 4.3%.
Why markets have moved higher
Share markets are fuelled by sentiment. In the case of U.S. markets positive sentiment has been driven by expectations of a “soft landing” for the U.S. economy and that the Federal Reserve Bank will move to cut official interest rates this year.
This has led some stock brokerage firms to raise their year-end targets for share markets while others have reduced them.
Another key factor feeding into the strong performances on U.S. share markets over the last year has been the strong gains by U.S. technology companies, particularly those linked to artificial intelligence advancements.
U.S. companies have just started reporting their second-quarter earnings amid predictions some investors may switch to undervalued companies to catch the tailwind generated by higher economic growth.
The Australian share market has also moved higher amid expectations that improving economic conditions and lower interest rates (when they occur) will lift domestic corporate revenues and earnings.
The latest returns from superannuation funds show that the broad gains on global equity markets have delivered double-digit returns to millions of fund members over the last year.
Investors using index exchange-traded funds (ETFs) and managed funds have also captured double-digit returns on global equity markets. In fact, market gains helped lift the size of Australia’s ETFs industry to more than $200 billion – a new record – over the first half.
Rather than trying to guess the best time to invest, it makes much better sense to just invest and stay invested.
Records are made to be broken
The reality for investors is that global share markets have been on a record run for decades. This is despite some substantial corrections along the way, such as during the Global Financial Crisis in 2008-09 and, more recently, in 2020 during the COVID-19 pandemic.
The Dow Jones Industrial Average – an equities index comprised of 30 U.S. companies – has gained more than 140% just since mid-July 2014, when it was trading at around 17,000 points
Over the same time frame the S&P 500 Index (made up of the top 500 U.S. stocks) has risen 198%, from just under 1,900 points to its present level, while the All Ordinaries Index (made up of the top 500 Australian stocks) has increased, albeit by a less-impressive 49%, from its 5,500 point level a decade ago.
Indeed, the upward momentum of global share markets dates back to when these and other share market indexes were first created.
Broadly speaking, the most successful investors don’t think in terms of days or weeks. Their strategies are usually built around much longer investment time blocks – often years or even decades.
In other words, its about time in the market, not trying to time the ups and downs of the market. Rather than trying to guess the best time to invest, it makes much better sense to just invest and stay invested.
Even a low initial balance may grow substantially over time when combined with compounding investment returns. By following a strategy of reinvesting distributions over a long period of time, the combination of market growth and compounding returns can deliver strong returns.
The key to any investment is having the right strategy in place to meet your needs and risk tolerance. Working with a financial advisor allows you to have a personalised strategy that takes into account market fluctuations and appropriate strategies for your stage of life. Book an appointment to chat with our experienced financial advice team here.
Source: Vanguard
Important information and general advice warning
Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer and the Operator of Vanguard Personal Investor. We have not taken your objectives, financial situation or needs into account when preparing this article so it may not be applicable to the particular situation you are considering. You should consider your objectives, financial situation or needs, and the disclosure documents for any financial product we make available before making any investment decision. Before you make any financial decision regarding Vanguard products, you should seek professional advice from a suitably qualified adviser. A copy of the Target Market Determinations (TMD) for Vanguard’s financial products can be obtained at vanguard.com.au free of charge and include a description of who the financial product is appropriate for. You should refer to the TMD before making any investment decisions. You can access our IDPS Guide, PDSs, Prospectus and TMDs at vanguard.com.au or by calling 1300 655 101. Past performance information is given for illustrative purposes only and should not be relied upon as, and is not, an indication of future performance. This article was prepared in good faith and we accept no liability for any errors or omissions.
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