The Eighth Wonder
For many investors it can be tempting to focus only on equity prices when thinking about the returns from their portfolios, particularly during turbulent periods such as the one we have witnessed since the start of February this year. The media often fosters this behaviour through the use of dramatic headlines that are designed to grab the attention of the viewer. Recent headlines in this vein that I have seen include, “The Stock Market is Having its Worst Second Quarter Since the Great Depression”. This sounds scary but the reality was more prosaic. As you can see here, this story was written two days into the new quarter and all because of just over 2% move in the S&P 500 index!
But if investors focus on this attention grabbing noise they risk ignoring what is actually one of the main drivers of return for portfolios. This is not just the price of securities but the dividends received from them which, when allied with the power of compounding, amply demonstrates the benefits of “time in the market” as opposed to trying to “time” the markets by second guessing when prices will rise or fall. When you buy equities or a fund you become an owner of the companies in which you have invested which entitles the shareholder to share in the companies’ profits through dividend payments.
Recent research from Schroders highlights how reinvesting such dividend payments in a portfolio rather than taking them out as income can be one of the most powerful tools available for boosting investors’ returns over time.
For example, Schroders highlight that if you had invested $1,000 on 1st January 1993 in the MSCI World index, by 7th March 2018 the capital growth would have generated a notional return of $3,231. In other words an annualised growth rate of 5.9%. But if all dividends had been reinvested the original $1,000 investment would have generated annualised growth of 8.3%. The extent of this difference can perhaps best be seen by looking at the overall growth in percentage terms – 323% without dividends reinvested but nearly twice as much at 640% with dividends reinvested.
This disparity is where “time in the market” comes into play because it is magnified due to the effect of compounding whereby gains can beget gains, which can beget even larger gains. Albert Einstein called this the eighth wonder of the world but it is available to us all.
The value of investments can fall as well as rise. You may not get back what you invest. Investments involve risks. The investment return and principal value of an investment may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original value. Past performance is not a guarantee of future results. There is no guarantee strategies will be successful.
The above article does not take into account the specific goals or requirements of individual users. You should carefully consider the suitability of any strategies along with your financial situation prior to making any decisions on an appropriate strategy.
MASECO LLP is authorised and regulated by the Financial Conduct Authority for the conduct of investment business in the UK and is an SEC Registered Investment Adviser in the USA. MASECO LLP trades as MASECO Private Wealth. It is a partnership registered in England and Wales and has its registered office at Burleigh House, 357 Strand, London, WC2R 0HS. MASECO Private Wealth is not a tax specialist. We strongly recommend that every client seeks their own tax advice prior to acting on any of the strategies described in this document. This document does not constitute and should not be construed as investment or any other advice. The information contained herein is subject to copyright with all rights reserved.