Don’t overestimate the market downturn


Investors shouldn’t overestimate the impact that the recent downturn in the financial markets had on their portfolios, Sharesight Managing Director Andrew Bird urged today.

“Many investors consider the performance of their share portfolios only in the context of changes to the stock price,” Mr Bird said.

“Investors should instead concentrate on understanding the true performance of their portfolios without focusing too much on short-term share price fluctuations. The long-term performance of a portfolio generally more than compensates for short-term ups and downs.”

Determining the true performance of a portfolio over the term of the investment should include a review of the following key factors:

  • Annualised returns
  • The impact of dividends and franking credits
  • Currency effects from overseas equity investments
  • Valid comparisons with returns from other alternative investments.

An annualised return enables investors to factor in share price movements over selected time periods for any individual stock or for a whole portfolio.

“If a stock’s price rose from $1 to $1.20, an annualised return will factor in how long it took for that price to increase. If it went up 20 cents in two years, it is only half as good as if it rose the same amount in one year,” Mr Bird said.

Share dividends were also an important factor to consider because they could often be more significant than a price change.

“A lot of people grossly underestimate the impact of dividends, particularly in the current tumultuous market conditions where a stock’s price might drop but it won’t affect the dividend the company will pay,” Mr Bird said.

Investors should also consider the impact that franking credits have on reducing or eliminating their tax liability for the dividend received from the company, depending on their marginal tax bracket. 

Mr Bird said that understanding the true value of a share portfolio enabled an investor to more accurately compare the returns with other investments and make balanced portfolio management decisions.

 “If you don’t know how well your portfolio is performing it can impact on the level of enjoyment you derive from monitoring its progress and from the rewards it generates,” Mr Bird said.

“It also means when you have a sudden downturn like we are experiencing at the moment, you don’t have the tools to accurately assess the impact on your portfolio, which can lead to panic selling.

“Having a good handle on a portfolio’s long-term performance can remind the investor that, even if they have lost money in the short-term, they are doing pretty well considering the overall period of their investment.”

For example, CBA’s total return over the last six months to 18 August 2011 was – 8.1 per cent, including a capital loss of 13.6 per cent and a dividend return of 4.8% per cent from the interim dividend received during the period.  This compares with its 10-year return up to the same date of 9.4 per cent per annum, with capital gain of 4.0% per cent and a dividend return of 7.2% per cent per annum.  The dividend provided more than half of the total return to the investor over this period.  This is not uncommon for many of the large dividend paying stocks in the ASX/S&P 200.

An online share portfolio management service like Sharesight is able to provide investors with a holistic view of the true performance of a portfolio with prices and dividends automatically updated daily.

“Many investors dislike record keeping and struggle to keep track of their portfolios because annualised returns are complex to calculate and investors do not have price, dividend or currency movement data at their fingertips” Mr Bird said.

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