Plotting the path of recovery is not always clear-cut, but if you find a way to review past performance in the sharemarket, then see how it might be applied to the future, you may well be rewarded.
Let's take a look at how you can plot your way to take advantage in this recovery by looking at the past, present and future.
First, let's start by looking at past recoveries.
Graph 1 below is the Australian All Ordinaries index after the 1987 stockmarket crash. It took around 10 years for the market to surpass the peak reached just before the crash of 1987.
Graph 2 is also the Australian sharemarket and the All Ords, this time in 1980. The pullback in the Australian sharemarket was much more gradual in 1980 and it took until 1984 until the market surpassed the previous peak.
(These graphs are small so if you would like to see larger graphs, send an email to moneymakers@belldirect.com.au.)
What these two graphs show is that the path of recovery is not always clear-cut.
The first thing you can see is that both recoveries followed a bumpy ride. The ride up isn't without its pullbacks and corrections but these pullbacks in a rising market can provide you with an opportunity to add to your portfolio.
The second thing you can see is that, in retrospect, the rise was inevitable. The winners invested in the sharemarket at the lower levels in order to profit when the market recovered.
For example, from the low in 1982 to the high in 1986 the market rose 150%. From the low in 1988 to the high in 1994 the market rose 90%.
The road to recovery is hard to navigate, particularly if you've been 'long' and held onto stocks throughout the fall. But if you have the ability to review the past and focus on the future, you can be rewarded.
Here is a chart showing the path to recovery so far for the Australian sharemarket, starting from the peak in 2007.
It might seem hard to invest in the sharemarket now, especially since it is up around 36% from the low in March.
However if you can learn anything from the past, it is that the ride up should be bumpy but also hugely rewarding.
This really is all about how you view the market.
Do you view the market from the viewpoint of the past and look through that to the future?
Do you look at the sharemarket and see the huge loss of 54%?
Or do you look to recovery and the gain of 120%? This is what the gain would be if you had taken a chance and invested near the lows and stayed strong when the market recovered to its previous high.
Some people look at the market now and see opportunity.
Others only see the risk.
All I know is, I'm much more comfortable buying on the pullbacks now compared with how I felt two years ago.
Where do you stand? Will you take advantage on this path of recovery?
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Happy investing!
Julia Lee Equities Analyst Bell Direct
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