FYI | Jul 21 2020
By Peter Switzer, Switzer Report
How would you like to make 30% a year in quality stocks?
What youre about to read is a risky play using the best quality companies and you need to answer the question: How would you like to make 30% in a year buying top quality stocks?
And because you have to be a risk manager when youre investing away from the safety of bank deposits, I have to ask: What if you might only make 15% per annum or in the worst-case scenario, only 7.5% a year? Oh yeah, plus franking?
Whats the stock?
Thats simple, any ETF for the S&P/ASX 200 IOZ, STW or A200. Of course, if you want to go for our top 300 stocks, you can think about VAS.
So,whats my thinking? And why am I tipping 30% in a year as my best-case scenario? The following chart will help explain it all.
Our market peaked at 7162 just before WHO told the world that were in a pandemic. Our stock market crashed to 4546, which was a 36.5% slump and has now climbed back to 6033 [last week]. Thats a 32.7% bounce back. But when a market falls 36.5%, it needs to rebound 57.5% to get back to where it was before we learnt to live with something called the Coronavirus!
Soin round figures, we need to see another 25% before getting back to our old pre COVID-19 high for the S&P/ASX 200 Index.
If this can happen within a year, then 25% plus dividends and franking gives us a round figure of 30%.
If it takes twoyearsits 15% per annum and if it takes three years its 10%.
The next question youd have to ask me is: whats the history for market rebounds after a stock market crash?
After the GFC, I interviewed one of Australias best data miners in the world researcher Phil Ruthven, the founder of the internationally-respected IBISWorld.
I asked Phil about how our market has rebounded after a crash. He said historically in the first year after a crash the rebound ranges from 30% to 80%!
From the chart above, you can see in the GFC, the rebound didnt start until March 2009. But by November it had shot up 44%. But it took until 2019 to pass the old high reached before the crash in 2008. On that criteria, given we only need 57% to get back to where we were before the crash, and weve rebounded 30%-80% in the past, then an ASX 200 ETF looks like a fair bet.
But lets look at how long it takes, say, the All Ords to regain its old high. This chart is the All Ords Index - Real. This means its adjusted for inflation. But it does the job telling us how long weve had to wait to beat a pre-crash high, giving us an idea of how long it might take for a rebound to appear.