ASX Education: Capital and Income

In response to a question in the Marcus Today Stock Discussion Group we worked out that over the last forty years the average total compound return from the All Ordinaries index per annum including dividends reinvested but not including franking over the last:

• 40 years was 11.18%.
• 30 years was 9.48%.
• 20 years was 8.66%.
• 10 years was 9.99%.
• 5 years was 9.02%.
• 1 year was 11.03%.
• Since the peak of the market in November in 2007 was 4.17%.

On that basis, it appears fair to suggest that the average total return from the All Ordinaries is around 9.5%, a commonly quoted expectation. Timing is everything of course, there are boom and bust periods that are not ‘normal’ and that significantly affect the average over any period but rather than adjust for those the better approach is to accept that they happen. The average All Ordinaries Total Return includes moments of irrational exuberance and irrational fear, but they all make up the averages which rather worryingly means that in order to achieve the averages you have to be able to hang on until the top (chickens underperform) and not sweat about the bottoms (not sell out at the bottom). And that highlights the intellectual pursuit of the stock market which is to do better than that. To beat the averages, to time the tops and bottoms and that requires you not to be a chciken - not to bail out early (before the irrational tops) and not to bail out in a crisis (at the irrational bottoms). In other words to beat the market you have to have courage, be brave, be unemotional, cold, a master of psychological warfare. You have to be objective enough to stand back and see the herd not be the herd, and react to (not predict…react) to the moments when the marketpsychology turns from greed to fear and from fear to greed…tough gig. Psychology/herd assessment is best analysed using chart/technical methods which are 'honest' and 'blatant' rather than fundamentals, you will never time the market on theory or logic, the market doesn't do what is logical, it will do what it does. The fundamental excuses come later. NEXT QUESTION Of course, the next question to pop up on the discussion group was “What is the average return from the All Ordinaries Index without the compounding of dividends”. Here’s the chart of the All Ords without the compounding of dividends (red line - not so impressive) against the All Ordinaries Total Return index again. Here are the numbers - the average total compound return from the All Ordinaries index per annum NOT including dividends over the last:

• 40 years was 6.70%.
• 30 years was 5.07%.
• 20 years was 4.15%.
• 10 years was 5.43%.
• 5 years was 4.48%.
• 1 year was 6.51%.

So the All Ords index returns around 5.0% per annum. Which leads us to the next obvious question “Can you break down the All Ordinaries Total Return into its separate components of capital return and compounded dividends". Yes I can – This table shows the average compound return per annum from the All Ordinaries index broken down into capital component and compounded dividends: As you can see the average contribution to the total return from compounded dividends before franking is about 4.5%. I have done a cursory calculation of the average franking in the Australian market weighted by market cap (complex and inaccurate guess) and it appears to be 72%. If that’s the case then you could say that the total return on average from the compounded dividends from the All Ordinaries including franking is 5.89%.

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SUMMARY:

• AVERAGE ALL ORDS capital return is approximately 5.0%pa.
• AVERAGE ALL ORDS return from compounded dividends is approximately 4.5%pa.
• AVERAGE ALL ORDS return from compounded dividends plus franking is approximately 5.89%pa.
• AVERAGE ALL ORDS total return including compounded dividends is approximately 9.5%pa.
• AVERAGE ALL ORDS total return including compounded dividends plus franking is approximately 10.89%pa.

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Not sure what good this does you…but it’s a number we should all (particularly the set and forget retirees) should have in the back of their heads as a mild long-term expectation. Although again, the annual return you will get per annum over your particular investment time period could be anything within the historical range of 12-month returns of +86.1% to minus 41.7% a year and on that basis will not be average. In which case this average calculation has been of little use other than as fodder for the marketing departments of boring long term “do nothing” fund managers….of which there are thousands. AND THERE’S MORE We can do this on a monthly basis as well - this is the average monthly compound return from the All Ordinaries index over the last forty years broken down into capital, dividend and total return. Obervations:

• Best months are April, July, December.
• The worst month is June - the only month to see a negative return including dividends.
• If it wasn't for dividends September, October and November would see negative returns.
• The three months ahead of Christmas are a market flat spot before the December rally.
• The most dividends come in March ands September (results seasons) although the biggest come from the banks which go ex in November and May.

I hope you can make some use of this. I’m not a great believer in using past statistics as a predictor of the future…but you might be. If it doesn’t affect what stock you buy, and when, its all just so much noise to me. But if it makes me look like a smart analyst (which is why analysts do this sort of boring number crunching rather than doing some real analysis) then maybe it does have some value!