Stock markets can go up or down but the average stock market return represented by the all ords index over the last 40 years has shown in can consistently outperform other asset classes like bonds or real estate over the long term.
The All Ordinary Index
The best way of tracking the share market over the long term is using a broad market index like the All Ordinary Index. It is Australia’s oldest and well known market index, the index is a market cap weighted index and is made up of all of the company listed on the ASX and represent some of the most well known Australian companies. Unlike the other ASX indexes which encompasses a sample of the largest companies on the ASX. The All Ordinary Index includes not only large cap stocks but also small and mid size companies and because of this it is seen as a barometer of the performance of the Australian share market.
This is why the historical returns of the index is a good representation of overall historical return for equity indices and risk premium in Australia. It is also the index with the most consistent data to calculate the long term returns of the stock market.
There are two versions of the stock market all ords, the most common index quoted is the price version and commonly quoted. This is a representation of the market based on today’s price. The accumulation version is a historical index which includes all of the dividends paid over time.
It is axiom that that equity markets due to the equity risk premium is the ideal core component of investor’s portfolio. Earning multiple fluctuates based on the point in the cycle and the starting point can play an important role in determining long term returns. When investors buy into a historically high P/E market, the long term return is much lower than if they would’ve bought in to a historically cheap market. However the longer you are in the market, the easier the volatility evens out.
The real drivers of long term return for stocks is earnings growth which and the subsequent dividends payout to shareholders.
All Ords Index Today – 12 month chart
The price graph above shows that the last 12 months has been a very volatile period for the share market. However for long term investors, it is important to step back and understand the yearly changes in the index within the broader context of the long term returns.
Long Term Stock Market Return – ASX All Ordinary Index History
The return have been segmented into:
Returns by Decade – Every 10 year periods (i.e 2010 – 2019)
|wdt_ID||Return Period||Price Appreciation||Price and Dividends||Value of Dividends|
|2||2010 - 2019||3.9%||8.4%||4.5%|
|3||2000 - 2009||6.9%||11.4%||4.5%|
|4||1990 - 1999||8.1%||12.3%||4.2%|
|5||1979 - 1989||15.9%||21.0%||5.1%|
Last 10 Years of Returns – Lowest Return Decade
The data shows the historical stock market returns for the last 10 years for the index (2010 to 2019) has been the poorest out of the last 40 years where the all ordinary index only increased 3.9% per annum. The last decade has been difficult for the commodity sector as the last mining boom ended in 2013 and mining shares has struggled ever since. Miners were a major drag on the index as miners and financials make up 40% of the index. The financial sector had its own issues where we had a real estate boom and bust, the major 4 bank share price couldn’t make up for the difference.
The highest returning decade was during the 1980s (including the 1989 crash) where the market increased more than 20% per annum.
However this can be deceptive as it is important to differentiate between nominal and real returns. Even though the returns were high in nominal terms, the 1980’s were famously known as a high inflationary period. The actual real returns calculated once inflation is taken into account is comparable to the recent period where the CPI has average at best 2.5% per annum in the last 20 years.
Cumulative 10 year periods (i.e last 30 year return for the all ords)
|wdt_ID||Years||Return Period||Price Appreciation||Price and Dividends||Value of Dividends|
|2||Last 10 Years||2010 - 2019||3.9%||8.4%||4.5%|
|3||Last 20 Years||2000 - 2019||5.4%||9.9%||4.5%|
|4||Last 30 Years||1990 - 2019||6.3%||10.7%||4.4%|
|5||Last 40 Years||1980 - 2019||8.7%||13.3%||4.6%|
Dividends play an important part of the long term returns. Australian stock prices over the last 40 years have appreciated by 8.7% per annum but dividend yields for the market has consistently averaged around 4.5%.
This means as price appreciated depending how long you are in the market dividends has consistently made up from half (over the last 40 years) to equal to the price appreciation of the market during the last 10 years.
All Ords Chart – Price vs Accumulation
The long term all ords chart shows the price increase vs compounding impact of reinvesting dividends. The starting point in 1980 has been indexed to 100 and the chart shows the difference between a portfolio that took out the dividends paid every year verses a portfolio that reinvested the dividends.
The results shows that the compounding of the dividends reinvestment can make a major difference to the long term returns between portfolios.