Market Movements
This article addresses a common misconception about the buy-and-hold stock investment strategy applied to the Japanese Stock market since the late 1980s.
A case study that always comes up, every time index performances over long periods are mentioned, is the performance of the Japanese Nikkei 225 index since the late 1980s.
The Nikkei 225, or the Nikkei Stock Average, more commonly called the Nikkei or the Nikkei index, is a stock market index for the Tokyo Stock Exchange. It is a price-weighted index, operating in the Japanese Yen, and its components are reviewed twice a year. Wikipedia
After recovering from the Black Monday crash of 1987, the Nikkei 225 index continued to rise until December 1989 when the index value in 1989 was only recently reached in 2024 as the chart below shows:
Black Monday (also known as Black Tuesday in some parts of the world due to time zone differences) was the global, severe and largely unexpected stock market crash on Monday, October 19, 1987. - Wikipedia
This is what happened to the Dow Jones index in the US:
In Japan, the Nikkei 225 fell 14.9% on Blue Tuesday, since it was already Tuesday in Japan once the US day ended. However, the Nikkei index recovered and continued to rise to nearly 39,000 levels in December 1989.
But, once 1990 rolled in, the stretched valuations in the Japanese stock market led to a fall in the headline index and for the next 34 years, it stayed below the same 39,000 levels. Only in Feb 2024, i.e. 34 years later, the stock market reached (and later exceeded) the levels last seen in 1989.
Superficially, given that the index has stayed below the December 1989 level until February 2024, investors have not made any money (at least not by indexing - there could be individual stock returns or intermediate returns more than zero in the period) just by a simple buy-and-hold strategy.
However, as the official Nikkei site explains:
The Nikkei 225 is a price-weighted equity index, which consists of 225 stocks in the Prime Market of the Tokyo Stock Exchange. - Source: indexes.nikkei.co.jp
The above definition means that the index movement we have been discussing so far is the returns of the stock prices. It does not include the Dividends these stocks would have been paying.
Total Returns from a Stock = Price movement + Dividends Paid
Total Return Index = Price Indiex + Reinvested Dividends
The Nikkei 225 Total Return Index (Nikkei 225 TRI), which is derived from the Nikkei 225 price index and reinvests the dividends of the underlying stocks has obviously risen to a level much higher than the Nikkei 225 price index.
This gap of 67,000 on the Nikkei 225 TRI and the 39,000 level on the Nikkei 225 represents an additional 72% over 35 years which implies an average annual dividend yield of 1.56%.
That may not appear to be a lot. But this is Japan we are talking about.
[Chart image from tradingeconomics.com]
The answer is “not a lot, especially since the 1990s”. From a high of around 3% in early 1990, inflation in Japan went down from almost zero to even negative since the 2000s.
Only since October 2021, inflation has picked up to moderate, by Japanese standards, for some time.
This is where reinvested dividends gave a boost to the low stock market returns over this entire period.
We have Total Return Indices in India as well. Here is the SENSEX TRI chart:
The average dividend yield that comes out of this chart is around 1.63% since 1996. It is quite amusing that the social and mainstream media speak a lot about “Sensex reaching 100,000” while the SENSEX TRI reached that particular one-lakh level back in July 2023. Mutual funds, since they receive the dividends from the stocks they hold, are always benchmarked against Total Return Indices.
1. Email me with any questions.
2. Use our goal-based investing template to prepare a financial plan for yourself.Don't forget to share this article on WhatsApp or Twitter or post this to Facebook.
Discuss this post with us via Facebook or get regular bite-sized updates on Twitter.
More posts...Disclaimer: Content on this site is for educational purpose only and is not financial advice. Nothing on this site should be construed as an offer or recommendation to buy/sell any financial product or service. Please consult a registered investment advisor before making any investments.
This post titled Market Study: Did Japanese Stock Market Investors Really Not Make Any Money Since the Late 1980s? first appeared on 16 Oct 2024 at https://arthgyaan.com
