The lists of Australia’s wealthiest individuals and families published annually by different media organisations are generally an interesting read.
Ranking them by their net wealth, they show that many of the richest Australians have progressively become richer over time through a combination of business expansion, market forces and shrewd investment decisions.
In fact, looking at the aggregate data compiled over the last 20 years, the combined wealth of the top 200 wealthiest people has increased more than five-fold to over $300 billion.
Yet, the real story behind these rich list rankings only becomes apparent when one digs a little deeper and compares how individual fortunes have changed from year to year.
Total wealth gains have not been uniform. Some individuals and families have managed to increase their fortunes every year, without fail. But others, because of unfavourable market conditions, poor investment decisions or a combination of both, have suffered losses over the same time and slipped well down the overall rankings. Some have even fallen off the rich list entirely.
The power of cumulative returns
Had the latter cohort, who have slipped down or off the wealth rankings, simply adhered to a diversified managed investment strategy over the last 20 years, their net worth would have at least trebled.
To illustrate this point, we’ve compiled our own data showing the respective gross cumulative returns over 17 years from four different investment strategies based on an initial $10,000 investment back in 2002.
The reason we’ve picked 17 years is because this coincides with the inception of Vanguard’s four diversified LifeStrategy index funds, covering conservative, balanced, growth and high growth allocations.
By definition, our conservative diversified investment strategy is structured around a portfolio of different funds with a 70 per cent allocation to fixed income investments and 30 per cent to equities.
Our balanced strategy is split 50:50 between fixed income and equities funds, our growth strategy 70 per cent equities and 30 per cent fixed income, and our high growth strategy 90 per cent equities and 10 per cent fixed income.
The results are illustrated in the table below showing what a $10,000 investment made in December 2002 would have been worth at 30 September 2019 based on the respective cumulative investment returns from each strategy without any additional capital contributions.
|Total Cumulative Return Value*
|Gross Annual Return ^
* At 30 September 2019. ^ Gross annual return since inception.
Note that the above returns assume the reinvestment of all income distributions, and do not take into account any management cost rebates. Gross returns are calculated before allowing for management costs, but after transaction costs.
What the numbers show, however, is that even an investor who stuck with the conservative investment strategy all the way through since inception would be well ahead by now.
And keep in mind that the last 17 years includes the huge markets dip through the period of the Global Financial Crisis from late 2007 through to early 2009, and all the most recent volatility brought about by economic, geopolitical and trade concerns.
The benefits of regular contributions
The return numbers by value become even more compelling when regular capital contributions are added to the equation.
To do this we’ve used the compound interest calculator on the Australian Securities & Investment Commission’s MoneySmart website, using the same $10,000 initial deposit 17 years ago and the same gross annual return percentages. However, we’ve added in a regular deposit amount of $217 per month, which equates to $50 per week, compounded monthly.
The table below shows the total cumulative return value based on regular monthly deposits having been made since inception based on the same four diversified LifeStrategy index funds.
Again, the returns assume reinvestment of all income distributions and do not take into account any management cost rebates. The gross returns have been calculated before allowing for management costs, but are after transaction costs.
|Total Cumulative Return Value*
|Gross Annual Return ^
* At 30 September 2019, based on a $50 per week contribution. ^ Gross annual return since inception.
Regardless of the investment strategy chosen at the beginning of the period, investors with a modest regular contributions strategy would have increased their initial $10,000 holding more than ten-fold.
Inputting higher initial deposit numbers and higher regular deposits will obviously produce even more impressive long-term results.
Vanguard’s late founder John C. Bogle encapsulated all this so well when he stated: “Stay the course. No matter what happens, stick to your program. It’s the most important piece of investment wisdom I can give you.”
By Tony Kaye, Personal Finance Writer, Vanguard Australia.
Reproduced with permission of Vanguard Investments Australia Ltd
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