Share market is still a good long-term bet
WE recently passed the 25th anniversary of the stockmarket crash of 1987. It was a remarkable event which saw the Australian share market fall 42% in a single month. However , that crash now appears as a mere blip on the long-term chart.
If you bought stocks such as Bond Corp, Bell Group and Elders IXL you would have lost everything, had you bought good quality shares, you may have done very nicely indeed over this twenty-five-year time period.
A $10,000 investment in BHP at $2.70 in October 1987 would now be worth $220,000 or a return of 13% per annum by October 2012. National Australia Bank share price has risen from $3.90 in October 1987 to $25.79 in October 2012 and when you add in the dividends paid, this represents a return of over 11% per annum, with the other banks being very similar. $10,000 invested in NAB shares would be worth over $135,000 if you re-invested your dividends or over $66,000 if you didn't.
The interesting part of this exercise is the income component of the investment. Not only has the share price risen over that period of time but in 1987 NAB shares were paying a dividend of just 12 cents per share, and today pay out over 90 cents in dividends for every share, each six months, a very nice protection against inflation in deed. Our original $10,000 purchase of NAB shares would today be paying out $4,615 in dividends. I'm positive that our investor in NAB shares thought plenty of times of switching to cash over the last twenty five years. The alternative of course was to play it safe, and put the funds in the bank. Investing $10,000 in a fixed term deposit with the big banks your $10,000 investment is still worth $10,000 and paying approximately around 4.5% in interest or some $450.
It highlights that a diversified approach often wins over the longer term.
Jason McFadden is a Certified Financial Planner with JPM Financial Planning. This Editorial is general advice only.