Where Have S&P500 Returns Come From?
Our colleagues over at Plexus Asset management in South Africa put out a fascinating study of the history of S&P500 returns. Prieur du Plessis writes:
"Albert Einstein described compound growth as the eighth wonder of the world. Although he may have passed away in 1955 – coincidentally the year when yours truly saw his first ray of light – the concept of compounding remains the single most important principle governing investment. Compounding simply means that you can earn interest on your principal investment amount, as well as earn interest on top of interest. The power of compounding can make an investment grow much faster than would otherwise have been the case, and is obviously based on the assumption that interest or dividends are reinvested in the same asset...
More compelling proof that the odds are stacked against the capital-growth-only brigade is gleaned from an analysis of the components of the total return figures. Let’s go back to the total nominal return of 9.2% per annum and see how that was made up. We already know that 2.2% per annum came from inflation. Real capital growth (i.e. price movements net of inflation) added another 2.2% per annum. Where did the rest of the return come from? Wait for it, dividends - yes boring dividends, slavishly reinvested year after year, contributed 4.8% per annum. This represents more than half the total return over time!"
The chart reveals all:
click for larger chart
Fascinating stuff -- thanks, Prieur!
>
Source:
COMPOUNDING: IT’S A KIND OF MAGIC …
Prieur du Plessis
Plexus. Independent Insight in an Uncertain World.
Tel.: +27 21 970 2400
www.plexus.co.za
Friday, May 11, 2007 | 11:55 AM | Permalink
| Comments (19)
| TrackBack (1)
add to de.li.cious | 
digg this! | 
add to technorati | 
email this post
TrackBack
TrackBack URL for this entry:
https://www.typepad.com/services/trackback/6a00d8341c52a953ef00d83513c7c253ef
Listed below are links to weblogs that reference Where Have S&P500 Returns Come From?:
» Tops in den Blogs (2) – die Börsenwoche from Das Börsen Weblog
1. Ruhe vor dem Sturm An der Börse geht es ja recht ruhig zu. Zugleich mehren sich aber die warnenden Stimmen. Zum Anthony Bolton, einer der Gurus von Fidelity, schreibt Handelsblatt-Redakteur Frank Wiebe. Bolton geht davon aus, dass die... [Read More]
Tracked on May 20, 2007 2:31:01 AM
Comments
Now dividends are 1.8%. So the expected return for stocks if buying today is 6.2%. Not much higher than T-bills.
Posted by: Mike M | May 11, 2007 12:00:50 PM
The comments to this entry are closed.
