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…
- Dividends are enormously important to your total returns,
- 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…
- Dividends aren't everything – growth is just as important,
- 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.
