Boring Is Beautiful

You’ll Hardly Care If You Don’t Beat The Market

The end of the 2020 calendar year feels like a good time to look back over one of our more boring investment recommendations;Australian Foundation Investment Company (AFIC).

The Rundown

AFIC, as you well know by now, is a listed investment company (LIC) that uses smart people to pick stocks that the fund managers think will provide outsized returns in the future. This is probably a good time to point out that over the long term the majority of fund managers cannot outperform a simple index fund. The recommendation here is simple;invest in an index fund. If you, like me, realise that this is boring advice,feel free to read on.

Investing A Little

If you had invested $2k in April of 1993(1,136 shares) and ticked the DRP box, what sort of results would you be looking at now in 2021? Keep in mind that I have assumed that the tax rate of the investor is 30% and so all franking credits have been used in a pass-through to the tax man.

Well for starters (as you likely know) the share price is $7.30. Your current investment would be worth $34,039.90 and you’d now have 4,663 shares. You could expect $1,094.88 in dividends in the coming 12 months if dividends stayed flat. This is 54.74% of your initial $2k investment, every year. You would have grown your capital 17.02 times at an annual compound growth rate (CAGR) of 11.069% p.a.

These have been updated up to and including the most recent dividend and DRP round in September with all totals based on the latest share price.

The Environment

Things that have happened in the last 28 years and AFIC has still earned an 11.1% p.a. return:

The wake of the recession we had to have

Asian Financial Crisis

Tech Boom and Bust

9/11 Terror Attacks

Gulf & Iraq Wars

GST implementation

GFC

Greek Debt Default

Russian Credit Crisis

Brexit

COVID-19

RBA Cash Rate hits 0.1%

RBA begins bond buying in a serious way

This is a story of how ‘dumb’ buy and hold investors have actually managed to do incredibly well for themselves simply by staying put and not chasing the latest fad. Keep that attitude up for nearly three decades and you’re golden.

Investing A Normal Amount

Now I hear what you are saying; nobody invests $2k initially and they certainly don’t stop investing throughout their lives. So with that, more than fair, critique taken on board I present to you the figures for AFIC since 1993. Let's assume you invested $5,000 upfront and then you invested $2.5k every half until today. This is not only fair but probably acts as a surrogate estimate of actual investing behaviour. That is;buy in $5k bundles and then slowly but surely accumulate more via dollar cost averaging.

Assuming you checked the DRP box (available the entire time AFIC was in action over this 28 year period) and your tax rate averaged 30% (same as the franking tax rate). You would have started with a fund value of $4,998.40 (rounded down as you obviously can't buy more shares than you can pay for). You acquired 2,840 shares at $1.76 each.

Over the next 28 years you put in $145k in extra cash ($2.5k every 6 months plus the original $5k, with this September completing year 28). Including your reinvested dividends, you bought 91,158 new shares along the way. You started, as you’ll remember, with 2,840. This has turned your initial $5k investment and 6 monthly purchases (worth $145k all in) to a current value of $686,878.90.