In what is regarded as a horror year for shares, the ASX 200 index continues to put up very respectable returns

1) A day after the Dow Jones Industrial Average Index (DJX: .DJI) capped its best month since 1976, US stocks fell back on the first day in November as markets prepared for the Federal Reserve this week to hike interest rates by another 75 basis points.

Wall Street had rallied on hopes of a Fed pivot, whereby the US central bank would soon signal to the markets that it would slow the pace of interest rate rises. 

Ron Temple of Lazard Asset Management rained on that parade, quoted on Bloomberg…

“Hopes for a Fed dovish pivot are misplaced if today’s job openings are any guide. Despite other signs of economic deceleration, the job openings data taken together with nonfarm payroll growth indicate the Fed is far from the point where it can declare victory over inflation and lift its foot off the economic brake.”

2) October was also a good month for the S&P/ASX 200 Index (ASX: XJO), the benchmark index gaining 6%. 

Bank stocks roared back to life, the Westpac Banking Corporation (ASX: WBC) share price soaring almost 18% higher, whilst the Commonwealth Bank of Australia (ASX: CBA) share price jumped almost 17% higher for the month of October. 

After jumping another 113 points higher yesterday, the ASX 200 index is down less than 5% over the past 12 months, a very respectable return considering…

a) The falls on Wall Street, the S&P 500 Index (SP: .INX) being down almost 17% over the last year, with the NASDAQ-100 Index (NASDAQ: NDX) off 30% over the same period.

b) The shellacking handed out to growth stocks, particularly loss-making tech stocks.

c) The pace of interest rate rises as central banks fight rampant inflation.  

3) Investing is about looking forward, not in the rearview mirror.

Looking ahead, the short to medium term direction of the stock market will once again come mainly down to four things…

a) Interest rates.

b) Economic growth or recession.

c) Inflation.

d) Earnings risk.

Throw in a war in Ukraine and ongoing geopolitical risks, and it all adds up to the prospect of more volatility ahead.

As an investor, you can spend your time trying to predict these macro forces in the forlorn hope it will help you jump in and out of the market with perfect timing.

Good luck with that one. 

Would your macro “analysis” have told you to jump back into stocks on October 1st, in advance of the big rally for that month? 

And would your analysis now tell you to stay in, get in, get out or something in between?

I’d suggest it’s a futile exercise at best, and likely a sub-optimal investing strategy.

If you invest in the stock market, you should make it a lifelong endeavour, not something you jump into and out of depending on your mood, the market’s mood, or the macro environment.

For most people, investing monthly into a few low cost ETFs is the best option, something like…

Vanguard Australian Shares Index Fund (ASX: VAS)

Vanguard International Shares Index Fund (ASX: VGS)

Vanguard MSCI Australian Small Companies Index ETF (ASX: VSO)

Vanguard International Small Companies Index Fund (ASX: VISM)

There are other options, and other providers, but something like the above will serve you well over a five plus year time frame.

4) Speaking of time-frames, when markets are on tenterhooks today awaiting the Fed’s next interest rate move, it’s easy to forget that the global economy will be far different in five year’s time than it is today.

For one, inflation is likely to be significantly lower. Interest rates likely won’t be rising as quickly as they are today. Corporate profits for many companies are likely to be far higher than they are today. 

If even some of that comes to pass, you can likely expect the share prices of many companies will also be significantly higher come 2027.

Between now and 2027, you will have to see through this period of volatility, plus you’ll have to endure further periods of volatility caused by factors like recession, natural disasters, inflation, deflation, conflict, politics… and that doesn’t include pandemic and financial crisis. 

In return, especially from these somewhat depressed levels, you have the opportunity to compound your investments at around 8 – 10% per annum, a return far in excess of leaving your money in the bank.

5) For those wishing to amp up the potential returns – by investing in individual stocks – by definition, they’ll also be amping up the risk. 

That’s because they’ll be less diversified than an index fund, and with each individual pick, there will be a chance they are wrong, with the company and therefore the underlying stock price significantly under-performing. 

Worst-case, your $5,000 investment into a company could turn into $500 or even less, as has happened to investors in fallen buy now pay later hero ZIP Co (ASX: ZIP), its share price having crashed 90% over the past 12 months.

Best-case, you could make many multiples of your money. Although the Domino’s Pizza (ASX: DMP) share price has had a rough time of it recently, over the past 10 years it has gone up almost 7 times in value. Since its IPO in late 2014, the Lovisa Holdings (ASX: LOV) share price has gone up over 12 times in value.

Personally, I enjoy the intellectual challenge of picking individual stocks, and the thrill of finding the hidden gem that has the potential to multiply my money several times in the years ahead.

I like to fossick in the micro-cap sector, a space where you can find fast growing companies that are either ignored, under-appreciated or unloved. Including a selection of such companies in an already diversified portfolio can be fun and profitable, not withstanding the reality that not every micro-cap stock will be a winner.

The post In what is regarded as a horror year for shares, the ASX 200 index continues to put up very respectable returns appeared first on The Motley Fool Australia.

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Motley Fool contributor Bruce Jackson has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Lovisa Holdings Ltd, Vanguard MSCI Index International Shares ETF, and ZIPCOLTD FPO. The Motley Fool Australia has recommended Dominos Pizza Enterprises Limited, Lovisa Holdings Ltd, Vanguard MSCI Index International Shares ETF, and Westpac Banking Corporation. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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