The S&P/ASX 200 (Index: ^AXJO)(ASX: XJO) should return 7% to 10% plus dividends each year over the ultra-long-term – on average.
Indeed, according to Vanguard, since 1970 the Australian sharemarket has returned 9.9% per year on average, including dividends.
A financial planner will assume growth of between 5% (conservative) and 10% (aggressive) when they model your investments in shares.
But have you ever asked why?
Risk
Academics say that shares — and property — are riskier than other assets like bonds and term deposits. Therefore, investors should demand a higher return.
But they're wrong because they don't understand risk.
Of course, throughout your lifetime, share prices will rise and fall — sometimes dramatically.
But that doesn't make them riskier.
Ask yourself: If the price of your house goes down 20% next year does that make it a worse (i.e. riskier) investment or a better investment?
Same house, more potential.
That's the way I see it.
So why are shares such a good investment?
Shares are such a good investment because they represent part ownership of a business.
Ask yourself: Who are the five richest people or families you know?
Chances are, a few them are — or were — business owners. Given how many people you know, it's no coincidence.
It doesn't matter if they are a tyre repair shop owner, own three laundromats or a bricklaying business. What's important to note is that businesses make money.
And, typically, only the biggest businesses are listed on the stock exchange.
For example, last year, business-owners (read: shareholders) of Commonwealth Bank of Australia (ASX: CBA) enjoyed a return of 15%.
I'm not talking about share prices going up 15% – Commbank shares are up around 9% over the past year, plus dividends.
I'm talking about the return to the business. Australia's largest bank achieved a return on equity (ROE) of 15% last year. Meaning, for every dollar of shareholders' money invested in the company it returned 15 cents in a year.
Ask yourself: Would a bricklayer look back on the financial year which just ended and measure business success by looking at its share price (if it had one)?
No.
Instead: Would he or she look at the cash returns they made?
More likely.
Ultimately, share prices can be expected to increase over the long-term on average because you are buying part of a business.
But in the short-term, prices can swing wildly up-and-down. That's your opportunity.
Foolish Takeaway
The message I'm trying to convey is simple: Buy. Good. Businesses. And hold them for the long-term.
If you buy the right businesses, I think you stand a good chance of matching or doing better than the historical average return of the sharemarket.
