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Lessons from 2006, a terrible time to retire for ASX investors

The Australian stock market has seen a stagnation in returns since 2006, leaving many questioning the wisdom of long-term equity positions. For retirees, it's a particularly fraught issue, as their financial security depends on how these investments perform.

The Australian stock market has been treading water for the past 16 years. In April 2007, the bellwether S&P/ASX 200 reached about 6,400; it closed Tuesday at 7,100. This extended lack of growth has troubling implications for those who have entered retirement in this period. Certainly, it makes diversification and patience critical investment principles for retirees seeking financial security when their capital is not appreciating.

That said, this lack of capital growth has not deterred investors; they still love the Australian stock market because it’s an amazing source of franked dividends. This is particularly so for self-managed superannuation fund (SMSF) trustees, with the average DIY portfolio still holding about 30 per cent Australian shares, including many companies offering fully franked dividends.

But investing in shares should be about capital growth, too. So, for those who have been in the market since 2006, there’s a surprising and disheartening revelation: they have suffered virtually a nil return on their investments.

  • The 16-year stagnation

    The fact the market has stood still for 16 years has left many questioning the wisdom of long-term stock market investments; for retirees, this issue is particularly pronounced, as their financial security depends on their investments. Although franked dividends help compensate for the meagre capital growth, they’re not a cure-all.  

    The question to ask, therefore, is what factors have contributed to the prolonged stagnation of our stock market, and what are the implications for retirees?

    Commodity dependency: Australia’s economy heavily relies on commodities such as iron ore, coal and natural gas, so fluctuations in global commodity prices have a significant impact on our market. The stagnation can be partly attributed to the volatile nature of these commodities and the flow-on effect to the mining and oil and gas companies that comprise a healthy component of the ASX.  

    Economic cycles: The Global Financial Crisis in 2008 and subsequent economic challenges have hindered the market’s growth. Our economy experienced periods of slower growth, which in turn affected stock prices. Retirees expecting their investments to provide steady income have found it challenging achieving that goal.

    Lack of technological innovation: The ASX is not as tech heavy as stock markets in other countries. The absence of groundbreaking technological companies, which have been driving growth in other markets (think the five FAANG stocks on Wall Street), limits opportunities for significant returns. This issue is particularly relevant for retirees who may have sought growth-oriented investments to support their retirement income.

    Dividend-driven market: Australian investors have often favoured dividend-paying stocks. Although these stocks provide income, they may not offer the same capital growth potential as high-growth stocks prevalent in other markets. Retirees may rely heavily on dividend income, and the lack of capital growth can reduce the sustainability of their retirement funds.

    Low interest rates: The prolonged period of low interest rates has made other asset classes, such as bonds and real estate, more attractive, diverting investment away from the stock market. Retirees – who often seek low-risk, income-generating investments – may have shifted their portfolios away from stocks, missing out on potential capital appreciation.

    The implications for retirees

    The 16-year stagnation in the stock market raises several critical considerations for retirees.

    Income challenges: Many retirees rely on capital growth to supplement their income-generating investments, helping to cover the overseas trip or the unexpected medical expense. The lack of capital growth in the market can make it difficult to maintain their desired standard of living.

    Longevity risk: With life expectancies increasing, retirees must prepare for the possibility of an extended retirement. The lack of capital growth can exacerbate longevity risk, making it challenging to sustain retirement savings over a longer timeframe.

    Reassessing investment strategies: Retirees may need to reevaluate their investment strategies and consider a more balanced approach that includes growth-oriented assets alongside dividend-yielding stocks. This can help provide a cushion against inflation and increased expenses in retirement.

    Seeking professional advice: Given the complexities of financial markets and the unique needs of retirees, seeking guidance from financial advisers is crucial. Advisers can help retirees adapt their portfolios and income strategies to navigate these challenging conditions.

    This stagnation in our equity market is a sobering reminder of the cyclical and unpredictable nature of financial markets. For retirees who entered retirement during this period, the challenges are particularly pronounced; they must adapt and rethink their strategies to ensure financial security during their post-work years.

    Although our stock market may have struggled to deliver substantial returns over the past 16 years, the principles of diversification, patience, and a well-balanced investment portfolio remain essential in the pursuit of a financially secure and fulfilling retirement.

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