Is the ASX 200’s stellar 2021 performance normal?

Is the ASX 200’s stellar 2021 performance normal?

| More on:
Business man watching stocks while thinking

Image Source: Getty Images

We Fools like to tout the virtues of long-term investing. Holding a basket of quality ASX shares with a long-term horizon is one of, if not the, best way to invest for maximum wealth creation. Well, that’s the Warren Buffett playbook, and it seems to have worked pretty well for him over 6-plus decades of investing.

But what about those investors who don’t like investing? And perhaps have followed one of Buffett’s other pieces of wisdom – buy an index fund and just keep adding to it.

This ‘passive investing’ method is also recommended by many investors – and for good reason. By entrusting your capital to an index fund, your money can just follow ‘the market’ over time. Sure, you might not get a juiced-up return. But you also don’t have to put nearly as much work into it.

So how would an investor who has followed this method of index investing have fared over the past year? Or 5 years?

How has the ASX 200 historically performed?

Let’s take a simple S&P/ASX 200 Index (ASX: XJO) fund like the iShares Core S&P/Asx 200 Etf (ASX: IOZ). This exchange-traded fund (ETF) is your typical Aussie index fund – just investing in every company on the ASX 200, proportioned by market capitalisation.

This index fund has returned an average of 9.82% per annum over the past 3 years, 9.97% over the past 5, and 8.37% since its inception in December 2010. However, it’s also returned 28.12% over the past 12 months, including 10.4% in 2021 so far alone (remember, it’s only June). Is that normal?

Well, no, not if you define normal as the long-term returns we discussed earlier. But wait, what about the market crash last year, you might say. Isn’t that distorting these numbers somewhat? Well, in a way. But the market crash happened over March and April last year. By early June 2020, the ASX 200 had already recovered close to 25% from its March lows. So we can take a large part of the ‘2020 crash factor’ away from the returns of the past 12 months.

Long story short, the returns that passive index investors have enjoyed over the past 12 months are not normal, at least by the ASX 200’s historical standards. Now, no one knows what the markets will do over the next year or two (or even the next day or two). But history tells us that we probably shouldn’t be expecting a 28.12% return every year from now on.

That might leave some investors disappointed. But that’s the way the cookie crumbles, as they say. But who knows, maybe if we all temper our expectations, we might be pleasantly surprised.

Wondering where you should invest $1,000 right now?

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes could be the five best ASX stocks for investors to buy right now. These stocks are trading at near dirt-cheap prices and Scott thinks they could be great buys right now.

*Returns as of May 24th 2021

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on How to invest