Grass not always greener on other side - even if it looks it
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.
Frequently Asked Questions about this Article…
Many Australian investors have been asking brokers about investing in US stocks because US markets — especially the S&P 500 — outperformed Australian markets over the 2009–2013 period. That stronger performance prompted interest in whether investing in US shares would have produced higher returns than staying invested in Australian indexes like the All Ordinaries.
From the lows in March 2009 to highs in March 2013 the S&P 500 rose from 666.92 to 1,563.62 (up 134.5%, roughly a 23.7% compound return). Over the same period the All Ordinaries went from 3,120.8 to 5,163.5 (up 65.4%, roughly a 13.4% compound return).
Using the article’s example: AUD 100,000 converted at the March 2009 low would have become about US$64,040, grown to US$150,174 by the S&P 500 peak, and converted back at US$1.0414 would equal about AUD 144,203 — a 44.2% return. That is less than the All Ordinaries’ 65.4% rise over the same period, so in that perfect‑timing example staying in the All Ords would have been better by about 21.2% (not counting costs).
Currency spreads and broker commissions reduce returns. The article notes that spreads alone would have 'stung you a few more per cent' and, because losses from fees compound over time, those transaction costs make overseas investing even less attractive versus staying invested in your home‑currency index fund.
Yes. When dividends are included, the All Ordinaries’ low‑to‑high return over the period was 96.4% (about an 18.4% compound return), significantly higher than the price‑only 65.4%. The US market’s yield was around 2.3%, and when you include dividends the S&P 500 total return for the period rises (the article quotes 151.9% for the US market including dividends). For an Australian investor the dividend effect made the All Ords comparatively stronger in this period.
According to the article, a passive Australian investor who simply bought an All Ordinaries index fund in Australian dollars would have been better off in the example given — less hassle, no currency‑conversion costs, and higher total returns once dividends are included. The piece argues that ignoring the temptation to chase US returns can sometimes produce a better outcome for everyday investors.
The key lesson is that index performance must be viewed in your domestic currency and after costs. A strong index in foreign currency terms doesn’t automatically mean better outcomes for a local investor once exchange rates, spreads, commissions and dividends are considered — 'an equity market index doesn't mean a lot if it's priced in Zimbabwean dollars.'
The article is written by Marcus Padley, a stockbroker with Patersons Securities and author of the newsletter Marcus Today. The article notes his views don't necessarily reflect those of Patersons and points readers to marcustoday.com.au for a free trial.
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