What is the Average Return of the ASX?
So what is the truth? What is the average return from the stock market? Fourteen per cent, nine per cent, or something else? I have done the calculation for you.
If we use the All Ordinaries Total Return index (it used to be called the Accumulation Index) which includes all cash dividends reinvested on the ex-dividend date (excluding franking credits) then here are some of the numbers
The compound return from the All Ordinaries Total Return index (ASX: XAOA) from June 1979 (when it started) to end June 2020 is 11.49%. You can safely quote this as the average return from the stock market.
Or can you?
Because, as with all statistics, you have to qualify it by defining precisely what period it relates to. In this case, 11.49% is the average total return from the stock market in Australia, over the last forty-one years, not including franking.
But before you start quoting 11.49% let me point you to the disclaimer. The disclaimer says that when you change the dates, the average changes. Of course they do. For instance, the All Ordinaries Total Return index not including franking to June 2020 varies rather a lot.
- Over the previous year from June 2019 to June 2020 it was 7.77%.
- Over the previous five years, it was minus 6.21%.
- Over the previous ten years, it was 7.77%.
- Over the previous twenty years, it was 7.41%.
- Over the previous thirty years, it was 9.05%.
- Since the bottom of the market in March in 2009, it was 10.44%.
- The highest twelve-month return was 86.1% (12 months to end July 1987).
- The lowest twelve-month return was minus 41.7% (12 months to end November 2008).
- 107 (22%) of the annual returns were negative.
- 379 (78%) of the annual returns were positive.
Then if you look at monthly returns instead of annual returns (the return in one month):
- The highest month on month return was 17.43% return in January 1980.
- The lowest month on month return was a 42.13% drop in the month of October 1987.
- 63.3% of monthly returns were positive.
- 36.7% of monthly returns were negative.
- The average monthly return is plus 1.04%.
But the main observation is that there is no average return. Averages are just statistics, not realistic expectations. If you want to know what to expect over the next five, ten, or twenty years you need to understand that it could be anything. Past average returns are fact, but there are no future average expectations other than those that suit the marketing of a financial product.
You could see any return in the next five, ten or twenty years, and there is nothing reliable about it at all. There is no average, and past averages are nothing more than statistics.
In which case you have no idea what returns you are going to get in your lifetime, in your timeframe. The future is unknown. Using averages is for salespeople selling financial products, facts allow confidence and confidence sells. But your average return will be something completely different, and those disclaimers about past performance are there for a reason.
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. The Morning Meeting “Show” was close to being a pop star as a nerd could ever get.
One morning the economist stood up and said “Today is my last day 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 I know that 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%.”
And it worked. Here we are thirty-five years later, and I still remember that morning meeting, nine per cent, and that economist.
Working at Patersons in 2014, I turned around to the dealing desk 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 fourteen per cent”.
“Fourteen per cent!” 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. Its broking 101. The higher the return and the more confidently you express it, the more orders you get”.
And it’s true. Who do you think is the better salesman? The chicken telling the truth, or the confident optimist selling the swagger? You know the answer to that one. There’s a reason they are called “con” men, because they sell with confidence, not concern.
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