Is the Australian Sharemarket back?

As happens every year or so, some finance commentators (whose profession is to commentate – not invest) are spruiking the possibility that the Australian Share Market may be close to fair value. This is purely based on the gains seen over the last two financial years, alongside a careful section of fair value measurements. However accurate, the question remains – is it too late to start investing in the Australian Sharemarket?

To answer this question, let’s look at a practical case study – someone who invested in the Australian Share Market at its 2007 peak.

When most finance commentators talk about the Australian Share Market, they reference the S&P ASX 200 Index. Unfortunately, this index only tells half the story of the Australian Share Market. This is because it only represents the share price of Australian companies. However, the total return we receive from a shareholding is made up of two components, a company’s share price growth (i.e. capital growth) and its dividends (i.e. income).

The chart below is that of the S&P ASX 200 Accumulation Index. It tells us a larger part of the story because it also includes the dividends paid by companies within the index. In fact, the accumulation index assumes that once a company pays a dividend, it is automatically reinvested in (i.e. used to purchase additional) shares of that company.

In other words, the S&P ASX 200 Accumulation Index represents what would happen if someone invested in the Australian Share Market and every time dividends where paid, they reinvested this money back into the share market.

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Source: IRESS Technologies

Interestingly, what the above chart illustrates is that even if you invested a lump sum of money at the share market peak in October 2007, by remaining invested in the share market and allowing your dividends to be reinvested, you would have recovered your initial lump sum investment by May 2013 (i.e. 5 ½ years later). This is despite one of the largest crashes (a 50% decline) and longest recoveries in Australian Share Market history.

The chart proves that the Australian Share Market can be a sensible investment if held over an appropriate timeframe. In just 5 ½ years, someone who invest $1,000,000 and saw this sum fall in value to about $500,000 in just 18 months, retained their original $1,000,000 by May 2013. Since May 2013, this $1,000,000 has grown about 10% ($100,000). Once again, this assumes that the investor has remained invested the entire time and during this time, reinvested their dividends.

The point is, although it’s important when you make an investment, what’s just as (if not, more) important is how long you intend on remaining invested for. Timing the market is a very tough exercise, making the decision to invest for the long term is much simpler.

“This document or website contains general advice only. You need to consider with your financial planner, your investment objectives, financial situation and your particular needs prior to making an investment decision. Charter Financial Planning Limited and its authorised representatives do not accept any liability for any errors or omissions of information supplied in this document except for liability under statute which cannot be excluded.”

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