With monotonous regularity, I will see a financial planner or broker put up a chart such as the one below and then loudly proclaim that you never have to worry just buy things and hang onto them because the market always goes up.
However, this does raise the question of what exactly drives the market up and does it have any relevance to the average buy and hold investor. The chart below looks at the returns generated by the S&P/ASX20 TR Index versus the All Ordinaries TR Index. You will notice that for the most part, the S&P/ASX20 tracks slightly below the All Ords – there are periods of minor periods of outperformance but they are transient.
This means that when you see a chart of a major index such as the All Ords you are actually seeing the performance of 20 shares, not 500. The remaining 480 contribute very little to the performance of the index. This is to be expected because of the mechanism of constructing an index – you would expect that the largest shares within an index and since the stocks that make up S&P/ASX20 are also components of the All Ords.
The implication of this is that for those who invest outside the top 20 is that the All Ords is a useless index for you to use to track the health of your portfolio.