A simple ongoing investment strategy can deliver substantial returns over the long term.
The Australian share market, when measured by the broad S&P/ASX All Ordinaries Total Return Index, has delivered an average annual total return of 9.2% since mid-1993.
Thirty years ago, Australia was still emerging from the economic downtown that then prime minister Paul Keating had famously described as “the recession we had to have” when he had held the role of treasurer in 1990.
Having been as high as 17.5% in 1990, official interest rates had been cut back aggressively to 5.25% by early 1993 to help stimulate economic growth. The rate cuts also bolstered returns on the Australian share market.
If an investor had invested $1,000 into the broad Australian share market on 1 July 1993 and done nothing other than reinvest the company income distributions they had received, their investment would have achieved a total return of 18.6% and increased to $1,184 by 30 June 1994. The numbers exclude investment fees or taxes.
And if that $1,184 investment balance was just left alone for the next 29 years, aside from reinvesting the income distributions received over time, it would have grown to $14,150 by 30 June 2023. That’s a huge total compound return of more than 1,300%.
But it’s nowhere near as big a return as it would have been if an investor had followed a simple regular investments strategy over the same period.
How regular investments add up
Source: Vanguard.
Notes: Data based on S&P/ASX All Ordinaries Total Return Index between 1 July 1993 and 30 June 2023. Assumes all income distributions reinvested. Excludes investment fees or taxes.
Adding $100 per month
Just by adding $100 per month, the initial investment of $1,000 on 1 July 1993 would have compounded to more than $166,000 by 30 June 2023. That’s based on the total return of the Australian share market, the addition of regular investments, and the reinvestment of all distributions.
In other words, by making $36,000 in additional $100 monthly investments into the Australian share market over 30 years, a $1,000 initial investment would have been worth over $150,000 more than the $14,150 balance if no extra contributions had been made.
The numbers, which assume you incurred no investment management fees, indirect costs, or buy/sell spreads, would have become even larger if higher regular monthly investments had been made.
Adding $200 per month
By adding $200 per month to the initial $1,000 amount an investment in the Australian share market, once again based on the performance of the S&P/ASX All Ordinaries Total Return Index, would have grown to more than $318,000.
That’s a $73,000 total investment (the initial $1,000 plus $72,000 in additional investments) over 30 years to achieve an investment worth $300,000 more than the $14,150 balance if no additional investments had been made.
Adding $500 per month
A regular investments strategy of $500 per month over 30 years ($180,000 in total) would have turned the initial $1,000 investment into more than $775,000 by 30 June 2023.
Here’s how the investment balance numbers would have looked at different points in time based on the actual performance of the S&P/ASX All Ordinaries Total Return Index from 1 July 1993 to 30 June 2023.
