Market briefing (no. 38) – 3rd August 2021

Olympic Gold
As we approach the final week of the Olympic fortnight, many of us have found ourselves challenging officiating decisions in sports that we rarely think about unless a multi discipline sporting event such as
the Olympics comes around every 4 (or 5…) years.

Being focused on headline gold medal achievements in sport is fine, but focusing on the headline numbers in investing can lead to inaccurate assessments and conclusions.

Don’t focus on the headline numbers
Often, when the return of a stock market index is quoted in the press…

… the quoted numbers show share price returns only (i.e. the price return), the example here being 4,395.26, rather than the total returns. This is potentially misleading, and understanding what figures are shown by the media is essential in counteracting anxiety.

The price return – in our example above being 4,395.26 – only takes into account the capital appreciation of the investment, in this case the US’ S&P 500(2). Any dividend (the share of the profits generated by a company that someone holds shares in), is ignored. This contrasts with the total return, which takes into account the reinvestment of the dividend generated in the underlying companies. Focusing on the share price return is not accurate, nor is it fair. This is because equity investments, such as shares, typically generate long-term returns from two sources:

1) capital appreciation (which is shown as changes in the share price return); and
2) cash dividends.

In order to have a fair, like-for-like comparison, it is essential to include the returns from both sources. After all, an investor would gain a total return performance from owning the asset in question.
‘So what’, you may ask?

Share price return versus total return
Continuing to use the S&P 500 as an example (with all returns in US Dollars due to the S&P being a US index), the following chart shows only the share price return of the S&P 500 for the period 31.12.1999 to 31.12.2020, with the share price only figure for those dates shown in the green (31.12.1999) and pink (31.12.2020) boxes respectively.

If you had watched a business briefing TV programme, bought a newspaper financial supplement or looked on the internet, on 31.12.1999 the share price only figure of 1,469.25 would have been shown, and for 31.12.2020, 3,756.07. A growth in the S&P 500 share prices of 155.65% during this period.
But why does this matter?
It matters as the financial differences are enormous! And knowing this will provide more accurate analysis when assessing how well investments are doing.
Note what happens when the dividends for these stocks are re-invested on top of the price and the investor receives subsequent growth on these dividends…

… the blue line marked ‘B’ still shows the growth in the share prices only of 155.65%, but as shown by the blue line marked ‘A’ the growth including the re-investment of dividends – i.e. the total return – increases to 239.45%; that’s an additional 83.80% in returns.

That may not seem much, so let’s change the percentages to US Dollars and look at what would happen if $100,000 (£71,818(4)) was invested on 31st December 1999.

At the end of the 21 years, based on the share price only figure (blue line ‘B’), the $100,000 is worth $255,645 (£183,630(4)). Whereas the actual, total return with dividends re-invested (blue line ‘A’), would have seen the $100,000 grow to $339,451 (£243,828(4)). An enormous difference in returns of $83,806 (£60,197(4)).

However, it is important to remember that when a company’s profits are down, they may reduce or even suspend their dividend payments to shareholders. Consideration also needs to be given to some companies being unable to survive the long term effects of the pandemic. A great example of ‘not putting all your eggs in one basket’. It should be noted that the figures displayed in the graphs above include similar significant events such as the Great Financial Crash of 2007/08, and show how the market has recovered.

So, when the media and press quote stock market figures, remember they are normally quoting the share price only index version.

As we have seen, the difference between share price only and total return is enormous in cash terms. Yet the media rarely speaks about dividends. We need to remember that when it comes to shares and their graphs, share prices (which is what the media publishes!) make all the headlines. We need to include dividends on top, as dividends produce the real returns and reflect a far more accurate picture. Knowing this when you see dramatic headlines will help you to remain focused on the real, long-term returns of your investment.

What should this tell you?

Irrespective of the news published by the media, and remembering that “past performance is no guide to future returns”, from an investment perspective, investors should have a balanced, longer term view.

As we have said many times before, we will continue to monitor the current financial situation and keep you notified of any significant changes that are made. Please contact your Foster Denovo Partner if you wish to discuss your financial situation further.

At times like these, it is even more important that you are taking advice on your finances by a qualified and experienced financial planner. If you think any of your friends, family or colleagues would benefit from speaking to us, especially in the current situation, then please introduce them to your Foster Denovo Partner who would be happy to help.

This week in history …

1st August 1793 – France becomes the first country to use the metric system(5)
1st August 1834 – Slavery Abolition Act 1833 comes into effect, abolishes slavery throughout the British Empire(5)
2nd August 1776 – The date most historians accept as the formal signing of the US Declaration of Independence by 56 people(5)
3rd August 1914 – British Foreign Secretary Edward Grey famously remarks “The lamps are going out all over Europe. We shall not see them lit again in our time.”(5)
4th August 1914 – Germany declares war on Belgium and Britain declares war on Germany, effectively starting what would be known later as the First World War(5)
5th August 1891 – World’s 1st traveler’s cheques issued by American Express(5)
6th August 1945 – Atomic bomb dropped on Hiroshima by the US B-29 Superfortress “Enola Gay”(5)
7th August 1485 – Henry Tudor’s army (the future Henry VII) lands in Milford Haven, Pembrokeshire, Wales(5)
8th August 1898 – Will Kellogg invents Corn Flakes(5)

Sources & definitions

1) https://www.marketwatch.com/investing/index/spx

2) The S&P 500 Index, or the Standard & Poor’s 500 Index, is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies. The index is widely regarded as the best gauge of large-cap U.S.
equities – https://www.investopedia.com/terms/s/sp500.asp

3) https://www.xe.com/currencyconverter/convert/ Amount=100000&From=USD&To=GBP

4) FE Fundinfo

5) https://www.onthisday.com

Issue 39 of the market briefing will be published on 7th September 2021

This publication is marketing material. It is for information purposes only. This statement is for the sole use of the recipient to whom it has been directly delivered by their Foster Denovo Partner and should not be reproduced, copied or made available to others. The information presented herein is for illustrative purposes only and does not provide sufficient information on which to make an informed investment decision. This document is not intended and should not be construed as an offer, solicitation or recommendation to buy or sell any specific investments or participate in any investment (or other) strategy. Potential investors will have sought advice concerning the suitability of any investment from their Foster Denovo Partner. Potential investors should be aware that past performance is not an indication of future performance and the value of investments and the income derived from them may fluctuate and they may not receive back the amount they originally invested. The tax treatment of investments depends on each investor’s individual circumstances and is subject to changes in tax legislation.