ASX Education: What Is The Average Return?
We had a question on the Marcus Today Stock Discussion Group on Facebook asking:
“Silly question but Marcus mentioned the average market return is about 9%, I assume that is capital growth and dividends included?”
(By the way there are no silly questions – we welcome all questions in the stock discussion group)
When I was at UBS Philips & Drew in 1985 we had a morning meeting every morning with a room full of 200 equity dealers and analysts would speak at a microphone – as close to being a pop star as a nerd could ever get. One morning our economist stood up and said "Today is my last year working in the City and I have been wracking my brain trying to think of something memorable to say in my last morning meeting that would mean I was remembered in perpetuity. As a classically dull boring and grey-haired old economist, this has proved to be a significant challenge because what could I possibly say now, having bored you for fifty years, that would be remembered forever, when all that has gone before has been forgotten. But I have worked it out. And it is this. Last night I averaged every number on every spreadsheet I have ever used over fifty years, and it turns out that the average statistic of every economic number that has ever come across my desk from the financial markets over the last fifty years and possibly the next fifty years is…NINE. This may seem insignificant to you, but it is not, it is the average of everything in the financial markets. So when you are next asked about the return on equity of Whitbread's European subsidiary, you can, rather than declaring your ignorance, fairly confidently declare it to be 9%. The average earnings growth of a listed company? 9%. The expected return on investment for a resources project? 9%. Your chances of picking up in a pub on a Wednesday? 9%. The average return from the stock market in any single year? 9%.
So that's where the 9% comes from.
I turned around to the dealing desk at the broking house I worked at once and asked what they thought the average return from the stock market was. I got ten different replies including an answer from one of our best salesmen who said confidently "It's 14%".
"14%!" came the reply from another dealer, "Where did you pull that one from". His answer was a lesson in salesmanship – "It's what I've always said. Yes, I made it up, but in this game, the more confidence you exude, the more orders you get".
No wonder he was the top salesman. Who gets the order? The chicken telling the truth, or the saleman selling the swagger? You know the answer to that one.
But let's not let a good story get in the way of facts. I have done the calculation for you this morning.
If we use the All Ordinaries Total Return index (it used to be called the Accumulation Index – code XAOA) which includes all cash dividends reinvested on the ex-dividend date (excluding franking credits) which started in 1979 at an index number of 1000 and is now 69,326 then here are some of the numbers:
The compound return from the All Ordinaries Total Return index (XAOA) from December 1979 to June 2019 is 11.18%.
You can safely quote this as the average return from the stock market, but as with all statistics you have to qualify it by saying, it is the average return from the stock market in Australia, over the last forty years, not including franking.
More numbers – The compound return from the All Ordinaries Total Return index (XAOA) not including franking:
- Over the last 10 years is 9.99%.
- Over the last 20 years is 8.66%.
- Over the last 30 years is 9.48%.
- Over the last 5 years is 9.02%.
- Over the last 1 year is 11.03%.
- Since the peak of the market in November in 2007 is 4.17%.
So now you know.
Continuing on the theme – here is a chart of 564 annual total returns since 1979. These have been found using the end of month value of the All Ordinaries Total Return index every month since 1979 and calculates a 12-month return from January to January the next year, then February to February. In the end, you get 564 twelve month returns since 1979.
- The arithmetic average of these 564 annual total returns is 12.28%.
- The highest annual return was 86.1%.
- The lowest annual return was minus 41.7%.
- 99 (18%) of the annual returns were negative.
- 465 (82%) of the annual returns were positive.
If you look at monthly returns, not annual returns (the return in a month):
- The highest return month on month was 17.43% return in a month.
- The lowest was a 42.13% drop in a month in October 1987.
- The next lowest monthly return was a 14.3% drop in a month.
- 63.5% of monthly returns were positive.
- 36.5% of monthly returns were negative.
- The average monthly return is 1.02%.
But the main observation is that there is no average, over the next ten years, twenty years, one year. Averages are just statistics, not realistic expectations. If you want to know what to expect you have to understand that over the next ten, twenty or one year you are going to get ten, twenty or one of these 564 returns (bars) and as you can see from the dispersion, they are not grouped around an average at all, there is no average. The average is just a statistic. In which case you have no idea which ten, twenty or one year returns you are going to get. The future is unknown. Using averages is for sales people selling financial products. What you actually get will be something completely different…