Can your SMSF survive these stormy markets?

Of the 26 trading days in 2016, 9 have seen the S&P/ASX 200 fall by more than 1%

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Since the beginning of this year, the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has dropped 8.5%, including a 2.6% fall today to trade at around 4,845 points.

Of the 26 trading days, we’ve seen 9 days where the index has dropped by more than 1% and just 4 days where it gained more than 1%. We’ve also had 3 days where the index has dropped by more than 2%.

Over the past 8 years, since the index reached an all-time high of 6,828 points, the ASX 200 is still down 29%. If you had your SMSF invested in the index, you’d be looking at close to a 30% capital loss.

What you might not realise though is that if you invested in the index and reinvested your dividends, you’d be ahead by 5.4% if you’d started investing at the high point of the market on November 1, 2007.

That shows two important lessons…

  1. Dividends are enormously important to your total returns,
  2. But only if you continuously reinvest them back into the market

A number of studies have also shown the importance of dividends in your total return, as we highlighted in this article in August 2015.

Had you owned just the 4 banks Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) in your SMSF from November 2007 and religiously reinvested your dividends, you’d be sitting on an average 62% gain (excluding franking credits).

That’s despite both ANZ and NAB showing capital losses of 8.7% and 30.8% respectively over the same period (CBA and Westpac share prices are up 30% and 5.8% respectively).

However, if you’d only had one share in your SMSF being CSL Limited (ASX: CSL), you’d be sitting on a 225% return now, including 177% in capital gains.

There are another few lessons there…

  1. Dividends aren’t everything – growth is just as important,
  2. Diversification can improve your returns

Foolish takeaway

To ensure your SMSF can survive these stormy markets, most investors should have a good mix of dividend and growth shares in their portfolio – and that means diversifying away from the usual suspects and looking outside the top 20 shares.

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Motley Fool writer/analyst Mike King owns shares in CSL Limited. You can follow Mike on Twitter @TMFKinga 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.

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