Andrew Page
Andrew Page

Given the apparent devastation that resulted from the Global Financial Crisis, a casual observer would be forgiven for thinking that stock market investors are still licking their wounds. After all, the Australian market more than halved in value between Late 2007 and early 2009 and still remains a good 25% below its all time high. Fortunes have been lost and, according to the popular media, the hopes and dreams of the soon to be retired baby boomers have gone up in smoke.

While this may be true to some extent for those that piled in near the height of the bull market (and sold in panic as the market dropped), the situation is vastly different for sensible and conservative long term investors which have done very well indeed, regardless of the recent ‘crash’. This is rarely discussed and largely goes unnoticed largely due to our obsession with the short term, although our tendency to elevate the importance of high profile market disasters also plays an important role.

High risk, speculative strategies aside, if one were to do nothing more complicated than invest in the largest dividend paying blue chip stocks, how would you have done over the past 10 years? We’re talking about nothing more advanced than buying and holding here, something that for whatever reason has lost credibility with your average investor.

The following table details the capital and income returns for the ASX 20 since the turn of the century.

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As you can see, even a long term holding in AMP, BXB and TLS have failed to deliver a profit. Having held those shares for 10 long years, there is still a significant loss even when you factor in the return from dividends. Examples like this tend to be used as ‘evidence’ against the long term approach, but those who expound these examples are being very disingenuous.

For starters, it assumes you have failed to effectively diversify, something that is extremely reckless and high risk. Despite what many believe, investing in the market is not all about picking the best stocks. Ask any seasoned investor and they will say that you should expect to make some dud calls from time to time. It’s just the way it goes, no matter how rigorous your stock selection strategy. What really matters is the performance of your portfolio as a whole, not the performance of any particular stock. It is the average that matters. The thing to focus on is this: an investor who spread their money across the top 20 would have seen a total return of 286%, despite having 15% of their money in poor performing stocks. And that’s after the worst market correction in over a generation!

Secondly, these examples assume that you cease adding to your positions as you continue to earn and save money. Regular contributions are not only essential for building a reasonable nest egg, but also act to smooth out returns through the process of dollar cost averaging.

The important thing to note though, even if we put these considerations aside, is that the vast majority of these stocks provided very attractive returns indeed. Even if we were to resist the temptation to focus only on the top performers (look at the returns from Origin Energy – ORG) and investigate instead the average performance, a very attractive picture emerges.

Starting with the capital return, we see an average gain of 215%. In other words, every dollar invested is now worth $3.15. Not bad given this is less than a year away from the bear market low of 2009. Furthermore, these are all large blue chip stocks which are considerably less risky than their smaller peers. People tend to think you must chase more speculative stocks to achieve attractive gains, but even a simple strategy of holding onto a diversified portfolio of blue chip stocks can greatly reward investors (and importantly, with substantially less risk).

What also becomes apparent from these results is how attractive the income return is. Most people tend to think that the dividends you get from shares, while not unwelcome, are really nothing more than a small bonus. But nothing could be further from the truth. On average these stocks have provided a total income return of 72%.

Think about that for a second. What would that look like from a property investors perspective? Imagine buying a house which not only more than triples in value over a 10 year period, but moreover has returned around three quarters of its purchase price through rent. Also imagine that that rent was largely tax free and that you haven’t had to pay a single cent in rates, maintenance and agent fees. That’s pretty impressive stuff.

Seven out of the top 20 stocks have in fact returned over 90% of their purchase price through dividends, with four of these entirely repaying the initial cost price and more. In essence these stocks could now drop to zero and investors will still walk away with a profit.

Perhaps you can see why even the worst market correction in a generation has failed to dissuade me from the benefits of share market investing. The fact is the market can be a volatile and uncertain place, especially in the short term. If we can only get over our obsession with quick and easy capital gains, and instead focus on being owners of enterprise (which is what we are as shareholders) with exposure to the growth and income of our businesses, we can significantly improve our personal wealth. We just need to be realistic, diligent and above all patient.

Andrew Page