The difference between many successful and unsuccessful investors is a few percentage points a year, every year.
The Power of Percentages
As a rough rule:
4% or less a year before inflation is made by an average share market investor. Among this group half have returns that are worse than 4% a year;
5% a year before inflation is made by a cautious investor – a term deposit and bond investor;
an average of 7.4% a year after inflation (before tax and with big annual variations) has been available for the last 106 years to an investor who bought an Australian shares index fund or the equivalent and held it.
19.7% a year (average achieved between 1965 and 2013) before inflation was enough to make Warren Buffet one of the richest men in the world.
Relatively small percentage increases make a vast difference over time.
It can be very important to fully appreciate the effect of percentages and compounding.
The table on the left comes from the unisuper website and shows “the returns of the Australian share market over the past century, after inflation” as an average of 7.4%.
Another website, MarketWatch reports: “Australia has had the best performing stock market in the world from 1900 to 2009.
Australia posted 7.5% after-inflation returns per year during that time, with a standard deviation of 18.2%, according to a study from Credit Suisse. Those returns are the highest and the volatility the second lowest of the 19 major markets the researchers studied.”You can read more about simple ways to increase your percentages on our Financial Planning page.