This is an article that was published in the Australian Financial Review on 8th August 2013, written by Philip Baker.
Having the foresight, discipline and stomach to buy and hold stocks over the past two decades has been a good strategy.
Of course, everyone’s dream is to make a truckload by finding a select group of small, cheap stocks that take off, and fill the bank account without lifting a finger. But for most investors, they never get to live that dream.
Although the dotcom boom provided some opportunities and, of course, there was Fortescue Metals, which from its low to peak would have turned $5000 into just over $6.5 million. But not many can pick the bottom and sell out at the peak; fear and greed make sure of that.
Mark Hancock at Precept Investment Actuaries has done some numbers covering the past 20 years ending June 30, 2013 for the sharemarket, and including dividends – he uses the S&P/ASX 200 Accumulation index – it was up 9.6 per cent per annum.
The average price gain was about 5.2 per cent and the average dividend return was 4.1 per cent per annum.
That means a $5000 investment in the benchmark S&P/ASX 200 index 20 years ago would be worth about $14,000 today but include dividends and it swells to closer to $31,000.
According to Hancock, if franking credits are included, then it’s about $40,000.
The same amount in Commonwealth Bank would be worth $134,200, including dividends, and $41,500 without.
The numbers from Precept also show that including estimated franking credits of 1.3 per cent per annum over the past 20 years shares delivered an average annual pre-tax total return of 11 per cent.
“We estimate that . . . 50 per cent of sharemarket returns over the past 20 years have been sourced from dividends and associated franking credits, measured on a pre-tax basis,” Mr Hancock said.
He also points out that three of the worst years over the past two decades have occurred in the past six years.
That means investors missed out if they started investing in 2008 because the past five years have been tough, with an average market return of 2.9 per cent.
But don’t lose hope.
“Based on the past 20 years and even the 10 years prior to that, it would be statistically unlikely to have such another disappointing five-year period . . . from 2013 to 2018,” he said.
It’s also worth pointing out that as bad as the 2008 to 2013 period has been for investors, the five years before, 2003 to 2008, were excellent for those invested.
And again, as bad as those five years were, when they are included in the decade 2003 to 2013, shares still managed to deliver 9.4 per cent per annum, including dividends.
And that’s not bad when compared with the 9.8 per cent, including dividends, that investors got in the decade from 1993.
It would seem being patient, sucking up all those headlines during the crisis and reinvesting the dividends was worthwhile.
The market’s dive during the crisis cast a question mark over the value of buy-and-hold strategies, and term deposits were viewed by many as a much safer way to play a market beset by uncertainty.
Stock picking can be tough at the best of times but pick them and it pays. Sonic Healthcare, for example, has turned $5000 into $196,000, including dividends, over the past 20 years.