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The most important thing you can do prior to becoming involved in the market is to ensure you have realistic expectations. While the market is a phenomenal wealth creation vehicle, it is not a zero risk get rich quick mechanism, but unfortunately many people approach the market thinking that they will be able to quit their jobs and live an extravagant life as a successful day trader – even if they have virtually no experience, little capital, and little understanding that day trading is in itself a full time job.
So what can we realistically expect? If you look at the All Ordinaries accumulation index (that is the All Ordinaries with dividends reinvested) over the past 30 years, it has delivered an annualized rate of return close to 11%.
Figure 1. All Ordinaries Accumulation Index 1979 - Present
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As such, I believe that this is the minimum you should expect on average. After all, what is the point of stock selection if you don’t even beat the average? You would be better off just buying an Index Fund and save yourself the trouble.
As you are no doubt aware, my preference is with quality industrials shares that pay attractive dividends. And the reason is because they show returns that are much more attractive.
Figure 2. All Industrials Accumulation Index 1979 - present
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The All Industrials Index has an annualized return which is over 14% - which might not sound like it’s very different from the All Ordinaries, but it is in fact a 24% improvement on the annualized return, and that adds up significantly over time.
Assume you started with just $10,000 in 1980, and add an extra $2k per year you would have made almost $740,000, even after the recent “crash”. Given that you had only invested $68k of your own funds, that’s a phenomenal 984% return on your invested capital.
I guess my point is that you don’t have to expect massive annual returns for your capital to show significant improvement over time. Moreover, if you focus your stock selection on these solid performing stocks you are able to exceed these returns by an even greater margin.
There is no such thing as a get rich quick, but a prudent and sensibly focused investment strategy can certainly help you achieve returns that outstrip other investment classes. Check out the www.dividendkey.com for more information on how you can build a successful investment portfolio.
Make the markets work for you
Andrew Page
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