Well that is a really difficult question to answer but I will try to give you some idea of what to expect. As more and more “make you rich quick” schemes hit the market the perception of trading shares becomes warped. Although most people know these products to be scams they still remember the figures they were given and somehow store this information as fact. The difficulty comes in when you try to prove that trading shares is not as profitable as some people think it is because there are many examples of companies that have grown 10,000 % and when this happens there is proof that you can become a millionaire overnight when trading.
The reality however is that the chance you will correctly pick one of those shares or get the timing right is highly improbable. Does this sound familiar? It should. At a casino many people become millionaires, most don’t. So you really should not base your belief on a stock exchange on the best possible scenario, neither should you base it on the worst possible scenario although you should be aware of what the worst possible scenario is.
So what is an average return from the stock exchange and how can it be determined? The best indicator to look at is indices within the stock exchange. In South Africa the best index to look at will be the JSE Top 40 Index. This shows the performance of the top 40 companies listed on the JSE. Many asset managers and fund managers use the JSE top 40 as their main investment instrument. This includes the major banks in South Africa.
The growth of the top 40 over the last five years is shown in the table below:
As you can see, there is quite a change year on year and although all the results are positive they still fluctuate quite substantially. So if you would like to work out what a compounded investment would have made over the last five years simply do the following:
Initial deposit x X x X x X = Total Value of the Investment
The Profit = Total Value of Investment – Initial Deposit.
Using an initial deposit of R20,000.00 would have totalled a profit of X over the last five years.
It is very important to note that this is what would have happened had you invested 5 years ago. There is no guarantee that this trend will continue as there is no guarantee that the Top 40 will carry on growing. We can look at past performance as an indicator but it is a rough guide to what is possible and by no means an accurate prediction tool.
As with all investment there is always risk involved and it is your responsibility to fully understand the risks and also be aware of the worst case scenario should everything go against you. It is wise to start trading shares with money that you can afford to lose, therefore protecting yourself from financial ruin if there is a company crash.
In conclusion, if you invested in the top 40 JSE companies over the last 5 years you would have made X% on your investment had you not sold any of your shares over the last 5 years. What can you expect going forward? I am not brave enough to take a guess but it is always a good idea to look at indices before you look at individual stocks because your risk is spread over a large portfolio.