Great Returns

A question from the Stock Discussion Group: “Silly question but what would you consider to be a great, an average, and a poor return, from the stock market”. After two days of writing about that (CLICK HERE) and a night infront of the spreadsheets with a bottle of red wine for company, this table turned up which summarises pretty much everything to do with stock market returns in Australia. This table shows the average compound return per annum from the All Ordinaries index over various decades broken down into capital component and compounded dividends: As you can see the average contribution to the All Ordinaries total return from compounded dividends before franking is about 4.5% over any time period in the last 40 years. 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 of compounded dividends from the All Ordinaries including franking is 5.89%. In summary, if you want to know the average return from the stock market then you can break it down like this:

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

10.89% per annum including franking is a pretty good return. If that is correct then you double your money every seven years, triple it every 11 years, quadruple it every 14 years and 10x it every 23 years. Not sure what good this history lesson does you because the future is not the past, but it’s a number we might all (particularly the set and forget retirees) have in the back of their heads as a mild long-term expectation.

But before you assume that you need to understand that the annual return you will get per annum over your particular investment time period, be it one year, five years, 10 years or 20 years, will be five, 10 or 20 individual unpredictable one year returns that could be anything within the historical range of 12-month returns in the last 40 years which range between +86.1% to minus 41.7% a year and, on that basis, your investment experience will not be average.

This chart of the All Ordinaries total return index since inception in 1979 also makes it clear that timing is everything. You cannot rely on an average return unless you can shut your eyes to periods of utter disaster as well as periods of irrational exuberance, because the average includes both. Your job as a stock-market watcher and Marcus Today reader is to do better than have blind faith in the long-term, your job is to participate in the good times and, more than anything else, do whatever you can to avoid the significant downturns and by doing so save yourself both money and time.

In the end this average return calculation, whilst it took up two day’s worth of newsletter, is of little use other than as fodder for the marketing departments of long term fund managers as they try and sell you their particular stock market product. And here are a few other bullet points about past returns you might find interesting:

• The arithmetic average of 564 rolling 12 month total returns since 1979 (one a month) is 12.28%.
• The highest 12 month return was 86.1%.
• The lowest 12 month return was minus 41.7%.
• 99 (18%) of the 12 month returns were negative.
• 465 (82%) of the 12 month returns were positive.

And this chart shows the breakdown month by month with a few observations underneath - apologies for the small numbers in the table - the White bars are the total return from the All Ordinaries each month, the grey bars are the capital return and the blue bars are the dividends contribution:

• The highest one month return was 17.43% return in a month.
• The lowest one month return was a 42.13% drop in a month in October 1987.
• The next lowest one month return was a 14.3% drop in a month.
• 63.5% of one month returns were positive.
• 36.5% of one month returns were negative.
• The average one month return is 1.02%.
• The best months are April, July, December.
• The worst month is June - the only month to see a negative average 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.

This is what is called the seasonality chart of the All Ordinaries index. It shows the average performance of the index on any day of the year using the last 40 years which gives you a bit of a picture about the historical cycle of market performance. I’m not sure you can use it because if you add up any statistics like this you are bound to get a pattern but it doesn’t mean it repeats, it may just be random. But here’s the chart anyway in white with the performance this year in Orange.