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:
Fascinating stuff — thanks, Prieur!
COMPOUNDING: IT’S A KIND OF MAGIC …
Prieur du Plessis
Plexus. Independent Insight in an Uncertain World.
Tel.: +27 21 970 2400