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Learning the lessons of a turbulent year

WITH the dust having settled on 2001, some salient lessons have emerged for investors.

For most people, 2001 will be remembered as a time of political and commercial up-heaval.

The US terrorist bombings, the collapse of HIH, Ansett and Pasminco, and volatile investment markets are among the lasting memories.

It was certainly a year when global share markets produced below-average returns.

However, the year had some bright spots, and investors who panicked may be among the biggest losers.

Consider these facts. When the Australian sharemarket tumbled in the fortnight after September 11, the All Ords Index hit a low point of 2,867 points – down a whopping 16.3 per cent from its high for the year.

Likewise, when the US Dow Jones Index hit its low point in September of 7926.93 points, it was down 33.4 per cent from its all-time high.

But what happened next?

The All Ords bounced back 17.2 per cent over the rest of the year and the Dow Jones bounced back 26.6 per cent.

Investors who dumped their shares in the immediate aftermath of the terrorist attacks will be ruing their decision.

This experience shows the difficulty of trying to time the market. Sharp falls, and sharp rises, are generally impossible to predict.

That is why a patient, long-term perspective makes sense for most investors.

A quick analysis of the annual investment returns reinforces the same message.

International shares were a wipeout for most investors. The Dow, for instance, fell 7.0 per cent over the 12 months following its 6.2 per cent decline in 2000.

But these two poor results followed several years of spectacular gains.

The Dow gained 22.6 per cent, 16.1 per cent and 25.2 per cent over the three preceding years.

A long-term perspective shows that international shares are an attractive asset class.

Over the past decade, international shares have returned 12.4 per cent per annum, according to InTech Financial Services.

In Australia, returns from the share market were closer to the long-term average. The S&P/ASX 200 Accumulation Index (which includes dividends as well as capital growth) rose by 10.4 per cent last year compared with a 10-year average of 11.7 per cent.

One of the best places to park money in 2001 was in listed property trusts. They rose by an average of 14.6 per cent, benefiting from a downward trend in interest rates over the 12 months.

With little scope for further reductions in interest rates, the outlook for property trusts in 2002 is less appealing.

Australian bonds produced an annual return of 5.4 per cent, despite experiencing two negative quarters in the June quarter and the December quarter.

Cash, as ever, was a reliable performer, returning 5.2 per cent for the year.

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