A third straight week of gains has helped lift the market — as measured by the S&P All Ordinaries index — to a tickle below its all time record high. We’re now less than 2% away from passing the high water market that the index set in November 2007.
It’s rather sobering that it’s taken 12 long years to recover from the GFC meltdown. No wonder most people consider the share market risky — who wants to invest in something that could, at any time, wipe out half your wealth and then take over a decade to recover!?
Of course, such a view assumes you put all your money into the market at the very peak, and never contribute a cent more. One of the few free-kicks you get with investing is the ability to drip-feed your capital into the market over time; a process called dollar cost averaging.
More importantly, though, by focusing only on the so-called price index we ignore a major driver of shareholder returns: dividends.
The 3 or 4% yield you may expect each year from your average dividend stock doesn’t seem like much, but over time that makes all the difference. Indeed, in the long run, dividends tend to account for close to half the total market return.
Look what happens when you reinvest dividends back into the market, which is what the S&P All Ordinaries Accumulation index does:
When we factor in dividends, as we rightly should, we can that the market was at fresh record highs back in 2014. And since then, we’ve seen the market climb a further 50% or so.
That’s the power of compounding.
Sooner or later, we’ll see the more popular price index break new highs, and there’ll be plenty of coverage by the financial press. Only now you know they’re missing half the story and are around 5 years too late…
Invest regularly, invest for the long-term and remember the number one rule of compounding: don’t interrupt it!
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