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Is the S&P/ASX 200 a terrible investment?

Without looking, I want you to guess:

How much has the S&P/ASX 200 (ASX: Index: ^AJXO) (ASX: XJO) gone up over the past 10 years?

Remember, the ASX200 excludes dividends paid.

So what do you think?

25%?

100%?

200%!?

I wish.

The answer is 9.1%.

Figure 01. ASX 200 Performance Since 2005

Source: Google Finance

Source: Google Finance

That’s right, just 9.1% over an entire decade, according to Google Finance.

Indeed, today’s 2.65% fall in the ASX 200 wiped off 20% of this decade’s capital gains in less than half a day!

Now, I’ll admit if we included dividends, the returns from the market would likely be somewhere between 5% and 8% per year.

Still, for all the volatility and risk involved, the ASX200 has proven to be quite a bad investment to hold over the past 10 years.

That’s despite the Aussie sharemarket being the best performing in the world over the past 100 years.

Is the ASX200 a terrible investment?

Let’s have a deeper look at the ASX200 to find out what’s driving the poor returns.

Of course, the ASX 200 is made up of Australia’s largest public companies.

But what many investors don’t know is that, unlike other market indices, it’s heavily concentrated in the top five to 10 companies.

Company ASX200 weighting
Commonwealth Bank of Australia (ASX: CBA) 9.28%
Westpac Banking Corp (ASX: WBC) 7.30%
National Australia Bank Ltd (ASX: NAB) 5.98%
Australia and New Zealand Banking Group (ASX: ANZ) 5.94%
BHP Billiton Limited (ASX: BHP) 5.63%
Telstra Corporation Ltd (ASX: TLS) 5.33%
CSL Ltd (ASX: CSL) 3.22%
Rio Tinto Limited (ASX: RIO) 1.59%
Total: 44.27%

The big banks, which account for 28.5% of the market, make up the largest part of the ASX200.

Their large presence in the index is a result of the extraordinary growth in their share prices over the past two decades, since the early 90’s recession.

Indeed, a record-breaking recession-less streak of economic growth has allowed Australian household debt levels to push to new highs (above the pre-GFC levels of the USA) and the major banks have been in prime position to benefit.

Unfortunately, with the economy slowing as a result of dwindling mining investment, the banks are unlikely to be the driving force behind the ASX200 in the next decade.

Further, mining companies like BHP, Woodside, Fortescue and Rio Tinto, which make up a big part of the index, are likely to produce lacklustre results for shareholders as commodity prices continue to remain depressed.

Ironically, fund managers who get paid massive commissions to ‘beat the market’ will likely welcome the poor relative returns from the broader market (although they’d never acknowledge it!).

So the bottom line is this: If you thought the ASX 200 was a bad investment over the past 10 years, it could be terrible one over the coming 10 years.

Sure, it’ll go up over time. However, if want to maximise your returns, I think you need to actively manage your money.

I’m not talking about using a fund manager. After all, 55% of large fund managers and 68% of small-cap fund managers failed to beat the market in 2014, according to S&P Dow Jones Indices.

And I’m certainly not talking about day trading since a study by Massey University revealed that none of the 5,000 most popular trading strategies were consistently profitable.

However, what I am saying is you should ensure your share portfolio is invested for the long-term in quality companies, and always remain diversified across geographies and industries.

You can do this by opening a foreign shares account and purchasing directly. Alternatively, you could invest in a low-cost index fund that tracks a foreign market or buy an ETF on the ASX.

Foolish takeaway

I don’t mean to sound like a doomsayer, but the outlook for the local sharemarket isn’t rosy, and it is heavily concentrated in a few companies — few I’d consider good value for long-term investors.

So if you own an index fund tracking the ASX 200 make sure you do your research because you may be locking yourself in for sub-optimal returns over the next 10 years.

My advice is for all Australians to at least consider owning shares directly.

That’s what I’ve done and continue to do very successfully – with the help of The Motley Fool, of course.

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Motley Fool contributor Owen Raskiewicz owns shares of CSL Ltd.

Owen welcomes your feedback on Google plus (see below), LinkedIn or you can follow him on Twitter @ASXinvest.

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.