Differences in Diversity with Morgans
Crypto and high-stakes currency trading may be flashy and in vogue, while many stick to their tried-and-true bricks and mortar. But what of the ‘humble’ share? John Caruso learns that with patience and time come the rewards.
The share market offers a viable means of achieving long-term capital growth and tax-advantaged income. At its core, a ‘share’ represents a stake in the ownership of a company, while the stock exchange serves as a platform for investors to trade these shares among themselves. Historically, Australia has had several regional stock exchanges, including one in Charters Towers, Queensland, in addition to the primary exchange in Brisbane. During the 19th-century gold rush era, towns such as Bendigo also operated their own stock exchanges, providing a crucial source of capital for small mining companies. Notably, BHP, one of Australia’s largest companies, first listed on the stock market in 1885.
Investing in shares can potentially yield two key benefits: capital growth and dividend income. Australian blue-chip companies typically distribute dividends twice a year, while American shares usually pay dividends four times a year, providing investors with a relatively regular income stream in addition to potential long-term capital growth.
Stockbroker and partner at Morgans Noosa, Matthew Auger, explains how the All-Ords index is a classic measure of how the Aussie market is performing.
“Vanguard is a leading global investment management company, and according to their data, from 1980 the All-Ords Accumulation Index has generated an annual return of 11.1% including dividends,” he said. “It’s been a fantastic way to generate long term growth despite the last forty-four years including recessions in 1982, 1991 and 2020; the 1987 share market crash; September 11 terrorist attack; the GFC; the tech bubble implosion of 2000 and a pandemic!
“All that bad news, and still the market has done well.
“In 2023 the All-Ords Accumulation Index was up 12.98% – 8.42% capital growth and 3.56% dividends, this doesn’t include franking credits.
“This performance by the market was better than average despite conflicts in Ukraine and the Middle East.
“It goes to show the market isn’t influenced by just one event or aspect, however it can be oversensitive to events as we’ve seen recently when the Japanese central bank raised rates and the Japanese market fell 13% one day and rose 10% the next,” explains Matthew.
During results season, numerous companies announce dividend payments to their shareholders. For instance, the Commonwealth Bank of Australia (CBA), the country’s largest company, has declared a final dividend of $2.50 for 2024. This dividend is fully franked, meaning it comes with an additional benefit in the form of a franking credit of $1.07.
“The franking credit can be used to offset an investor’s tax liability or be refunded to the investor, depending on their tax rate,” Matthew said. “This feature is particularly advantageous for investors with shares held within super funds in pension mode, as the tax rate is 0%. Consequently, the franking credits are refunded back to the super fund, providing a valuable source of additional income.
“The problem with shares is that they can fall in price however you can mitigate against this by diversifying your holdings across different companies, different industries or even different countries.
“Furthermore, you can diversify your investments into other asset classes, Bank Hybrids for example (refer to IN Noosa Magazine edition #39), a moderate risk yet good income investment, and then there’s government bonds. In truly bad times government bonds tend to do well as investors flee to the safety of government-guaranteed bonds, we saw this in the GFC.
“And cash is also good for capital stability and reasonable income, these days term deposits are paying around 5%. It’s not hard to build a diversified portfolio that pays a good income.
“The share market is inherently volatile over the short term, with fluctuations in value being a common occurrence. However, adopting a long-term perspective can significantly alter the narrative, revealing a more dependable source of growth.
“Historical data as we pointed out earlier, illustrates this dichotomy and here’s another example. Since 1950, the All-Ordinaries has experienced declines in approximately one-third of all months. Yet, when examining a rolling 10-year timeframe, the Index has rarely posted losses.
“This stark contrast highlights the benefits of extended time horizons in mitigating risk.”
The relationship between time and market performance is clear, the longer the investment period, the lower the likelihood of incurring losses. By adopting a patient approach and weathering short-term fluctuations, investors can tap into the share market’s propensity for steady growth over the long term. The information in this article is generic in nature and you should always seek your own financial advice before making any investment decisions.
