The ASX 200 is less than 1% above its pre-COVID high set 3 years ago. So, why buy shares at all?

The ASX 200 hasn't had a great three years. Here's why I'm not worried.

| More on:
a man in a shirt and tie holds his chin in thoughtful contemplation and looks skywards as if thinking about something while a graphic of a road with many ups and downs unfurls behind him.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points

  • The ASX 200 hasn't had the greatest three-year period, rising by just 0.7% since February 2020
  • Some investors might be tempted to give up on shares, and leave their cash in the bank, considering those returns
  • But ditching ASX 200 shares could be a mistake for many reasons

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:

Created with Highcharts 11.4.3S&P/ASX 200 Price Return (AUD) PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.com.au

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

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.

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on How to invest

A happy young couple lie on a wooden deck using a skateboard for a pillow.
How to invest

How to build wealth with ASX shares without taking big risks

Many investors believe they need to chase high-risk, speculative ASX shares to grow their wealth quickly. But in reality, most…

Read more »

Happy man holding Australian dollar notes, representing dividends.
How to invest

How $500 a month in ASX shares could become $1 million

It might not be as hard as you think to become a millionaire through the share market.

Read more »

Man pointing an upward line on a bar graph symbolising a rising share price.
How to invest

How to invest when the ASX hits a record high

Worried about buying at today's prices? Here's why you shouldn't be concerned.

Read more »

A man wearing glasses sits back in his desk chair with his hands behind his head staring smiling at his computer screens as the ASX share prices keep rising
How to invest

Lessons from a self-made ASX millionaire

Here's how he did it.

Read more »

A couple cheers as they sit on their lounge looking at their laptop and reading about the rising Redbubble share price
How to invest

$20,000 in savings? Here's how to target $1,000 of passive income each month

This could be the easiest way to build a meaningful passive income from the share market.

Read more »

Three happy office workers cheer as they read about good financial news on a laptop.
How to invest

The 3 rules new ASX share investors should always follow

These rules could help you generate wealth in the share market.

Read more »

Person holding Australian dollar notes, symbolising dividends.
How to invest

How to build a $1,500 monthly income stream with ASX dividend shares

It isn't as hard as you think to build a monthly income stream on the share market.

Read more »

A smiling woman sits in a cafe reading a story on her phone about Rio Tinto and drinking a coffee with a laptop open in front of her.
How to invest

How to start your ASX share portfolio with just $1,000

Investing doesn't need to be hard. Here's an easy way to start.

Read more »