Grass not always greener on other side - even if it looks it
How many brokers have had an email from their clients recently asking whether they can deal in US stocks? A lot. The reason, of course, is because US markets have been doing so much better than Australian markets. The statistics don't lie.
If you take the S&P500 (a far better proxy to our own All Ordinaries Index than the Dow Jones), it is up from its low on March 6, 2009, of 666.92 to a high of 1563.62 just over a week ago and almost exactly four years later. That's a rise of 134.5 per cent in four years, or a compound return of about 23.7 per cent.
Over the same period the All Ordinaries Index is up from its low of 3120.8 on March 10, 2009, to a recent high of 5163.5 on March 12, 2013. A rise of 65.4 per cent from bottom to top, a compound return of about 13.4 per cent, or about half the return available in the US. Half the return. "Pitiful," I hear you cry.
Net result, a lot of Australian investors think they've been dudded investing in a backwater market like Australia when they could have been playing the big game in the US, which has not only recovered everything it lost since 2007, but is hitting record highs while Australian investors are having to put up with an All Ords index that is still down 27.4 per cent from its highs, and would have to jump another 37.7 per cent to hit its record high and another 46.6 per cent to match the returns US investors have enjoyed in the S&P500 Index.
So let's put this straight once and for all. If you were sitting on $100,000 cash in Australia on March 6, 2009, and with perfect sharemarket timing decided to convert it into US dollars and invest it in the S&P500 index at the lowest low, you would have ended up with an investment in the US market of $64,040. If you then rode the US market for all it was worth over the next four years to the record high this month, you would have ended up with $US150,174.
If, with your godlike timing, you then managed to pull out at this highest high a week ago and converted your money back into Australian dollars at $US1.0414 to the dollar, you would now have $144,203 for your trouble.
As you will no doubt have worked out, that's a total return for an Australian investor investing in the US market with perfect timing of 44.2 per cent, which is, amazingly for some, somewhat less than the 65.4 per cent you would have achieved just by leaving your money invested in the All Ordinaries Index in Australia.
In other words, rather than whingeing about what you've missed out on in the US you
should be thanking your lucky stars that you are 21.2 per cent
better off from ignoring the opportunity and doing nothing more imaginative than buying an index fund in Australian dollars.
And that has not only been a lot less hassle, it also doesn't take into account the costs involved in your currency transactions which, as everyone knows, would have
stung you a few more per cent just on the spread, let alone the commissions, and that lost money going in would have shown up, compounded, in your returns coming out.
And it doesn't stop there. If you do the same calculation and include dividends, you get an even better result for Australians.
If a passive Australian investor had invested in the All Ordinaries Index and included their dividends in their returns, they have actually made 96.4 per cent from low to high over the past four years, 31 per cent more, and a compound return of 18.4 per cent, almost exactly 5 per cent more a year. The US market, on the other hand, has a yield of about 2.3 per cent.
Compound that into your S&P 500 returns over the past four years and the US market is up 151.9 per cent, not 134.5 per cent, and an Australian investor doing the perfect thing in the US with a currency exchange would have made 54.9 per cent instead of 96.4 per cent but would be 41.5 per cent worse off investing in the US, not 21.2 per cent worse off.
Bottom line: An equity market index doesn't mean a lot if it's priced in Zimbabwean dollars.
Marcus Padley is a stockbroker with Patersons Securities and the author of stock market newsletter Marcus Today. For a free trial go to marcustoday.com.au. His views do not necessarily reflect those of Patersons.