This month: Marcus Padley
The average return from the Australian stockmarket changes dramatically depending on the period under review
When I was at UBS Phillips & Drew stockbrokers in London, in 1985, we had a daily morning meeting with a room full of 200 equity dealers, and analysts would speak at a microphone. This “show” was as close to being a pop star as a nerd could ever get.
One morning, the firm’s economist stood up and said: “Today is my last day working in the city and I have been racking 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 greyhaired old economist, this has proved to be a significant challenge because what could I possibly say now, having bored you for 50 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 50 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 50 years and possibly the next 50 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%. The average return from the stockmarket in any single year? 9%.”
And it worked. Here we are 35 years later, and I still remember that morning meeting, 9% 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 stockmarket was. I got 10 different replies, including an answer from one of our best salesmen, who said confidently “it’s 14%”.
“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. It’s 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.
So, what is the truth? What is the average return from the stockmarket – 14%, 9% 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 (XAOA) from June 1979 (when it started) to the end of June 2020 is 11.49%. You can safely quote this as the average return from the stockmarket.
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 stockmarket in Australia, over the past 41 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. 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 10 years it was 7.77%. Over the previous 20 years it was 7.41%. Over the previous 30 years it was 9.05%.
Since the bottom of the market in March in 2009, it was 10.44%.
The highest 12-month return was 86.1% (12 months to the end of July 1987).
The lowest 12-month return was minus 41.7% (12 months to the end of November 2008).
107 (22%) of the annual returns were negative (since 1979).
379 (78%) of the annual returns were positive (since 1979).
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% in January 1980.
The lowest month-on-month return was a 42.13% drop in October 1987. 63.3% of monthly returns were positive. 36.7% of monthly returns were negative.
The average monthly return is 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, 10 or 20 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, 10 or 20 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 flogging 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.
Marcus Padley is the author of the daily stockmarket newsletter Marcus Today. For a free trial of the Marcus Today newsletter, go to marcustoday.com.au.
You have no idea what returns you are going to get in your lifetime