25/07/2014

What a difference five years can make. Contrast, the fortunes of the S&P/ASX200 Index (prices only) and the S&P/ASX200 Accumulation Index (share price plus dividends) over this period.

Five years ago on July 16, 2009, the S&P/ASX200 closed at 3995.6 points with further to fall in the depths of the GFC. Move forward to July 16, 2014 when this index closed at 5518.9 points – a rise of 38 per cent.

By contrast on July 16, 2009, the S&P/ASX200 Accumulation Index closed at 27,332.5. And move forward again to July 16, 2014, this index closed at 47,043.6 – a rise of 72 per cent.

In short, the accumulation index passed its pre-GFC high almost a year ago and hit an all-time high this month. Meanwhile, the S&P/ASX200 (price only) is still way below its pre-GFC high.

The differing performance of the two indices reinforces some of the principles of sound investment practice.

These include why investors should understand the rewards of compounding with income being earned on past income as well as on the original capital and why investors should focus on their total return – not solely on price movements.

It is worth emphasising that investors who automatically reinvest dividends from direct shares or distributions from a share fund (including an Exchange Traded Fund) are really practising the discipline of dollar-cost averaging.

Rather than trying to pick the best time to buy shares or units in a share fund, investors who reinvest their dividends are buying more shares twice a year at dividend time, no matter the market conditions.

With this approach, investors obtain more shares when prices are lower and fewer when prices are high, averaging out their buying costs of the over the long term.