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Dimensional Perspectives

Headlines like “ASX rallies 30 points” or “ASX sheds 58 points” are a familiar sight for those who follow the financial media. 

But these types of headlines may have little relevance for some investors, given that a “point” for any index and what it means to an individual’s portfolio may be unclear. The potential for misunderstanding also exists among even experienced market participants, given that index levels have risen over time and potential emotional anchors, such as a 200-point move, do not have the same impact on performance as they used to. With this in mind, we examine what a point move in an index means and the impact it may have on an investment portfolio.

Headlines vs. Reality

Movements in the S&P/ASX 200 (or “the ASX”)1 are often communicated in points. Investors should be cautious when interpreting headlines that reference point movements, as a move of, say, 200 points in either direction is less meaningful now than in the past, largely because the overall index level is higher today than it was many years ago.

Exhibit 1 plots what a decline of this magnitude would mean in percentage terms over time. A 200-point drop in January 1993, when the ASX was near 1,500, equated to a roughly 13% loss. A 200-point drop in February 2003, when the ASX was near 2,800, meant a smaller 7% decline in value. And a 200-point drop in February 2019, when the ASX hovered near 6,200, would be equivalent to a 3.2% loss.


Exhibit 1: Hypothetical 200-Point Decline of the S&P/ASX 200 Index (price-only) Measured in Percentage Terms

Source: Bloomberg and S&P © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. The chart illustrates what a 200-point drop would have been in percentage terms for the S&P/ASX 200 Index (price-only) on a monthly basis. It assumes a 200-point loss took place at the end of each month from June 1992, to February 2019, and uses monthly historical closing values of the S&P/ASX 200 Index (price-only) to compute the percentage change. Percentage change does not indicate the actual change in the ASX during the period shown. Actual results may vary. 

How Does the ASX Relate to Your Portfolio?

While the ASX and other indices are frequently interpreted as indicators of broader stock market performance, the shares composing these indices may not be representative of an investor’s total portfolio.

Also consider that a ‘price index’ (how the ASX is often quoted – sitting around 6,169 at the end of February), does not take into account the return investors receive from dividends. This means a reported change in this index is unlikely to paint a complete picture of the return an investor would receive. For example, while the price return of the S&P/ASX 200 Index between 1995 and 2018 was 204%, the total return including dividends was more than 720%.2

Another consideration is the global nature of markets. For context, the MSCI All Country World Investable Market Index (MSCI ACWI IMI) covers just over 8,700 large, mid, and small company shares in 23 developed and 24 emerging markets countries with a combined market value of more than $70 trillion. By comparison, the S&P/ASX 200 Index represents shares in just 200 companies with a total market value of about $1.6 trillion.

Even though the MSCI ACWI IMI and the S&P/ASX 200 are both stock market indices, each tracks different segments of the market, so their performances can differ significantly over time, as shown in Exhibit 2. Since 1995, the S&P/ASX 200 Index (Total Return) has outperformed the MSCI ACWI IMI Index by an average of 2.2% (based on calendar year returns). However, relative performance in individual years can be much different. For example, in 2013, the S&P/ASX 200 underperformed the MSCI ACWI IMI by 23.5%


Exhibit 2: Performance of MSCI ACWI IMI Index (net dividends) and S&P/ASX 200 Index (Total Return) by Calendar Year

Source: Bloomberg and S&P © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. MSCI data © MSCI 2019, all rights reserved. ASX 200 Total Return is the S&P/ASX 200 Index (Total Return) (also known as the Accumulation Index). MSCI ACWI IMI is the MSCI All Country World Investable Market Index (net dividends). Their performance does not reflect fees and expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results.

It is also important to note that some investors may be concerned about asset classes other than shares. Depending on an individual’s needs, a diversified portfolio may include a mix of global shares, bonds, commodities, and any number of other assets not represented in a stock index.

One Final Point: A portfolio’s performance should always be evaluated within the context of each investor’s specific goals. Understanding how a personal portfolio compares to broadly published indices like the S&P/ASX 200 can give investors context about how headlines apply to their own situations.

Conclusion

It is the nature of news headlines that they are written to grab attention. A headline publicising a 200-point move in the S&P/ASX 200 may trigger an emotional response and, depending on the direction, seem either sufficiently exciting or ominous to warrant reading the article below.

However, we have shown that context is required when reading headlines:

  • First, a report about the point move in a single index in isolation says very little without reference to the level of the index itself. More pertinent is the percentage movement.

  • Second, the index mentioned on the news every night is typically the price index only. It does not take account of dividends. The total return, encompassing capital gain and income, is what matters to investors.

  • Third, for a diversified investor, with exposure to domestic and international shares, bonds, commodities, real estate and other assets, a move in a single indicator may not be as significant as the media indicates.

  • Finally, what ultimately matters is the extent to which each individual's portfolio is designed and managed to meet their long-term goals, preferences and risk appetites in a broadly diversified and cost-effective manner.

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Movements in the S&P/ASX 200 are typically quoted for the Price Index, as opposed to the Total Return Index (also known as the Accumulation Index). At the end of February 2019 the Price Index level was 6,169 whereas the Total Return Index level was 64,627. This section looks at the Price Index.

Based on the S&P/ASX 200 Index price return vs total return.

The issuer of this document is DFA Australia Limited (AFS Licence No.238093, ABN 46 065 937 671). 

 

Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Diversification does not eliminate the risk of market loss.

 

There is no guarantee investment strategies will be successful. Investing involves risks, including possible loss of principal.

 

All expressions of opinion are subject to change. This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Investors should talk to their financial advisor prior to making any investment decision.