Looking at the performance of the S&P/ASX 200 Index (ASX: XJO) over the past three years, an ASX investor might be a little disappointed. The ASX 200 closed on Thursday at 7,194.9 points, a fall of 0.02%.
Back in February 2020, just before the pandemic hit, the ASX 200 touched what was then an all-time high of around 7,140 points. That means that the ASX 200 has put on just 0.76% over the past three and a bit years, as you can see below:
Most of us invest in ASX shares in the hope of receiving better returns than keeping our money in the bank. A 0.7% return doesn't seem to make a good case for this path, though.
So why should we even buy shares at all? After all, you can get up to a 5% return or even higher from a savings account or term deposit today – investments that are predictable and don't come with the volatility that is inherent in the share market.
Well, I still think shares are your best bet for building long-term wealth. And as someone with the vast majority of my wealth invested in the share market, these apparently anaemic returns don't bother me at all. Here's why the ASX 200's performance over the past three years isn't as bad as it looks
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Why should we even bother buying ASX 200 shares?
For one, the pricing returns of the ASX 200 don't reflect dividend payments. Here on the ASX, dividends make up the lion's share of investors' overall returns. As we covered last month, more than half of the ASX 200's historical returns over the past two decades or so have come from dividends.
Dividends also often come with franking credits attached. These can boost returns even further than the dividend payments alone since they give us the opportunity to claim a tax deduction in most cases.
So, in reality, the overall returns of the share market over the past three years have been a lot higher than 0.7% when you factor in dividends and franking.
The other thing that keeps me from worrying about the ASX 200's returns is history. This index has an extremely long and durable record of delivering solid returns above inflation and cash. Take an ASX 200 index fund like the SPDR S&P/ASX 200 ETF (ASX: STW).
This exchange-traded fund has been around since 2001. Over this period, investors have enjoyed an average return of 7.71% per annum (as of 31 May). Just 2.66% of that 7.71% came from capital growth, with the remaining 4.72% coming from dividend returns.
But that doesn't mean investors receive a gain of 7.71% like clockwork every year. Some years, the ASX 200 might rise 15%, and then drop 4%. Other years, it might stay flat or go up and down. What matters is the long-term average, which you have to stay invested for many years to obtain.
So overall, I'm not worried in the slightest by the ASX 200's performance since 2020. The ASX 200 will always have a bumpy road to read. But throughout its long history, it has never failed to climb higher and reach new peaks.
