The All Ords index represents the aggregate performance of the individual stocks listed on the Australian Stock Exchange. Over the last 40 years, the All Ords Index has consistently outperformed other asset classes like bonds or real estate over the long term.
The All Ordinary Index
The best way to track the share market over the long term is to use a broad market index like the All Ordinary Index. It is Australia’s oldest and well-known market index. The index represents some of the most well known Australian companies. Each companies contribution in the index is based on the relative size of the company compared to the rest of the market as it is a market-cap-weighted index.
Depending on the index, the other major ASX indexes encompass a sample of the largest companies on the ASX, such as the largest 300 companies, 200 or even 50 largest companies listed on the ASX.
The All Ordinary Index includes large-cap stocks and a range of small and mid-size companies, and because of this, the performance of the All Ords is a barometer of the Australian share market’s performance. The index’s historical returns are a good representation of the overall historical return for equity indices and risk premium in Australia.
Given its long history, it is also the index with the most consistent data to calculate the stock market’s long-term returns.
All Ordinary Accumulation Index and Price
There are two versions of the All Ords Index:
- The most common index quoted is called the price version. This is a representation of the market based on today’s price. The price version is useful to gauge All Ords today’s performance but ignores dividends’ long-term contribution to returns.
- The accumulation version is a historical index that includes all of the dividends paid overtime which is a better benchmark to measure the long-term Australian stock market returns.
Due to the equity risk premium, it is an axiom that equity markets are the ideal core component of an investor’s portfolio. Earning multiple fluctuates based on the point in the cycle, and the starting point can play an important role in determining long-term returns.
When investors buy into a historically high P/E market, the long-term return is much lower than if they would’ve bought into a historically cheap market. However, the longer you are in the market, the easier the volatility evens out.
In the long run, the dividend payout to shareholders is just as important as earnings growth.
All Ords Index Today – 12-month chart
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The price graph above shows that the last 12 months have been a very volatile period for the share market. However, it is important for long-term investors to step back and understand the yearly changes in the index within the broader context of the long-term returns.
Long Term Stock Market Return – ASX All Ordinary Index History
The return has been segmented into:
Returns by Decade – Every 10 year periods (i.e 2010 – 2019)
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Last 10 Years of Returns – Lowest Return Decade
- The data shows the historical stock market returns for the last 10 years for the index (2010 to 2019) has been the poorest out of the last 40 years where the all ordinary index only increased 3.9% per annum.
- In the last decade, mining shares have struggled ever since the last mining boom in 2013. Miners were a significant drag on the index as miners and financials make up 40% of the index.
- Financial shares had their issues as well, in which we saw the real estate boom and bust, and the major 4 bank share price performance did not help the broader market either.
The highest returning decade was during the 1980s (including the 1989 crash), where the market increased more than 20% per annum.
However, this can be deceptive as it is crucial to differentiate between nominal and real returns. Even though the returns were high in nominal terms, the 1980s were famously known as a high inflationary period. The actual real returns calculated once inflation is taken into account are comparable to the recent period when the CPI has averaged at best 2.5% per annum in the last 20 years.
Cumulative 10 year periods (i.e last 30-year return for the All Ords)
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Dividends play an essential part in the long-term investment returns. Over the last 40 years, Australian stock prices have appreciated by 8.7% per annum, but dividend yields for the market have consistently averaged around 4.5%.
As price is appreciated depending on how long you are in the market, dividends have consistently made up from half (over the last 40 years) to equal to the market’s price appreciation.
All Ords Chart – Price vs. Accumulation
The long-term all ords chart shows the price increase vs. compounding impact of reinvesting dividends. The starting point in 1980 has been indexed to 100. The chart shows the difference between a portfolio that took out the dividends paid every year versus a portfolio that reinvested the dividends.
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The results show that the dividends reinvested and compounding power can significantly make a difference to the portfolio returns.