June is always an exciting month for us here. Not only is it the end of the financial year, but it is also the month in which the ASX/Russell Long Term Investing Report is released. You can read this year’s report here.
One of the reasons we love this report is that it underscores the importance of the long-term approach to investment. For example, in the 12 months between December 2014 and December 2015, the ASX 200 went from 5411 points to 5,295 points. That is a fall of just over 2%. If we add back the average yield on Australian shares for 2015 of 4%, then the overall return for the market was just under 2%. The CPI for the year was about that figure, meaning that the average investment in the share market did not gain or lose any purchasing power in that short one year period. Shares treaded water in 2015.
Treading water is better than drowning. But you could have swum a few laps if you had simply used a term deposit at your local bank.
However, one year is way too short a time period to gauge the success of an investment. If we extend the comparison beyond one year and go back ten and twenty years, a much different – and much more reassuring – story emerges.
For the ten years to December 2015, the average return on Australian shares was 5.5%. This is well above the inflation rate, and means that the average investor increased their purchasing power if they held their investment across that period. This is despite the fact that the Global Financial Crisis (GFC) occurred in 2007-2008. The GFC smashed share prices, and it occurred right at the beginning of the ten year period. Here is how the ASX Russell Report shows the return.
An investment returning 5.55 per year for ten years compounds to a total return of 70% for that period. If the initial investment was $100,000 in 2005, at the end of 2015 it was worth $170,000.
When we extend the analysis back over the twenty years to December 2015, the news is even better: the long-term rate of return was 8.7%. This is even further above the inflation rate and means that the investor who was in it for the truly long-term became decidedly more wealthy.
An investment returning 8.7% per year for 20 years compounds to a total return of 430% across that period. If the initial investment was $100,000 in 1995, at the end of 2015 it was worth $530,000.
This is why we always stress that investments must be made for the long-term. Ten years is really a minimum time frame; the longer the better. History shows that there are few, if any, ten year periods over which the share market turned in negative returns. Canny investors make use of that fact to substantially reduce the risk of their investment not performing.
If you would like to discuss the ASX/Russell Report and how you can use it’s insights to influence your own investing, please don’t hesitate to call us.
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