Shares and your super

Shares are often issued by companies to raise money from the investing public. The company gains funding and in return the investors become part owners (shareholders) who are entitled to a share of the profits (dividends) to come. This article focuses on shares that are traded on public markets, known as stock exchanges.   

Here are the key points we cover in this article:

• Why invest in shares?
• Investment risks
• Shares have a good track record of strong growth
• Shares can be volatile
• Shares at Rest

Investment risks

All investments carry risk and shares are no different. Shares are categorised as a ‘growth’ asset which means it is an asset class aimed at increasing the value of your investment, but also has an increased risk of negative returns over the short term. 

They are rated as ‘High’ or ‘Very High’ on the Standard Risk Measure. The key risks when investing in shares is that:

• returns are not guaranteed - there is no guarantee that shares will either pay dividends or increase in value; and
  
  
• potential loss of investment - share prices go and up and down for a variety of reasons, so the value of your investment may decrease and it is possible to lose all of your investment.  

Average annual return for shares over the last 30 years (ending December 2022)

Over this timeframe shares performed better than listed property², Australian Bonds³  and much better than cash (e.g. putting your money in a term deposit). However, it is important to remember that different asset classes have different risk profiles (e.g. investing in bonds or cash is generally a less risky investment than investing in shares) and that past performance is not an indicator of future performance and average returns are not guaranteed.

Additionally, these figures measure the return across an index meaning that this is the average return for all the companies listed in that index. It does not mean that the share price for each share listed on that market generated that return. In order to achieve a similar return over that period, you would likely need to have invested in a diversified portfolio of the shares in that market.

Shares can be volatile

While the average return of 9.75% p.a. for Australian shares over 30 years probably sounds pretty good, there have been big swings in the performance of shares over this period. 

For example, during the last 10 years Australian shares had calendar year returns of -39% in 2008 and -7% in 2002, but they also returned +19% in 2021 and +21% in 2013.

To have a chance of receiving investment returns similar to 9.75% p.a. over this time frame, you would likely need to have stayed invested the whole time. 

Unfortunately, some people may have panicked when they got a negative return and sold their shares and their returns may have suffered as a result.

In hindsight it’s easy to say you wouldn’t panic, but remember negative returns almost always follow bad news. In the last three decades we’ve had:

• the late 90s dot-com bubble;
  
• September 11 terrorist attacks;
  
• the second Iraq war;
  
• the 2008 global financial crisis;
  
• COVID-19; and
  
• the Russian invasion of Ukraine.

Each of which had a substantial negative impact on share prices.

Staying the course is not easy…

Historically, shares on the whole have been a strong performer over the long-term and although past performance is not an indicator of future performance, an appropriately diverse portfolio of shares can provide an attractive risk-adjusted return for investors who have a long-term investment timeframe.

However, share prices can be volatile. This volatility increases the risk of negative returns if you’re only invested for a short time. For that reason, investing in shares is more appropriate for investors who have a long investment horizon and it’s usually a good idea to invest in a diversified portfolio of different companies, to help manage your exposure to economic downturns and poorly performing companies.