The total return on your investments

Wednesday, 27 April 2016

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FTSE Total Return vs Price

This is a chart that I thought was worth sharing.

It can be depressing when you hear on the news that the level of the FTSE All Share stockmarket index is not much different than it was five years ago. What is the point of investing, with all the risks involved, if you don't get a good return on your money?

However, what is announced on the news is the official "price" of the FTSE index. This ignores any dividends that you receive as an investor, and that makes a very big difference indeed.

When you own shares, either directly or (as we would recommend) by buying an investment fund, you will receive dividends paid by companies to their shareholders. The same goes for investment funds that own bonds (which pay out "coupons", which are effectively interest payments) and property funds (which also pay out a regular income to unitholders). This isn't always obvious to investors, as most often the fund will "accumulate" this income and give you more units each year, or a higher fund price, in exchange, but the effect is the same.

If you buy a UK stockmarket fund at present you probably receive dividends worth between 3% and 4% of the value of your investments, every year. Bond and property funds vary, as do international equity funds, but they all pay something. That return is on top of any rise in the underlying price of your investments.

The effect of that income mounts up over time. For example, as shown in the chart above, if you just look at the official "price" of the FTSE All Share index it has risen by only 9.42% over the last 5 years. Not a great return you might think - even a savings account could have almost matched that.

However, if you include the dividends that you would have received, and look at the "total return" on the FTSE, you will see that you would actually have seen your investment rise by 30.51% over the last five years. Not a bad return at all! And that is during a period of intense uncertainty over the global economy.

This isn't meant as an assurance that you will always make money in stocks, bonds and property. There will be periods where you lose money even including the dividends, income and so on, and investing always involves risk. But the important thing is always to recognise that when you hear in the media that stockmarket performance has been dull in recent years, take that with a big pinch of salt, and check what the total return over the period has been - you might be surprised!

Independent financial advice. Regulated by the Financial Conduct Authority (FCA no. 603653). A brand of Dalbeath Financial Planning Ltd (company no. SC450460)