Some years ago, my sister-in-law and her husband settled in Germany, with good careers, a good life and a new baby. They made an appointment with a financial adviser at the bank, with a view to putting a bit of regular money into the stock market to build a pot for their daughter to give her a start in adult life.
They had no knowledge about investing in equities, or passion or time for learning about the subject, and asked my advice ahead of the meeting with the bank. I gave them the standard Motley Fool recommendation for people in their position: go for a low-cost index tracker.
Having imparted the advice, it occurred to me that I should probably actually have a look at the record of the DAX index Germanys equivalent of the FTSE 100. Well, I knew that Germany was the eurozones powerhouse, but I was thoroughly surprised to see by just how much the DAX had outperformed the Footsie. Crikey!, I thought, perhaps I should put a bit of money into a DAX tracker myself.
Then I made a discovery, which, despite being an experienced investor and commentator on the UK market and shares, came as a complete shock. Ill tell you what that shocking discovery was shortly. But first, heres why the subject has resurfaced.
I was struck by a distinct feeling of dj vu when I read an article at the weekend by one of my Foolish colleagues: Why Euro And US Rivals Are Set To Beat The FTSE 100. The article noted that, while the FTSE 100 was up a measly 12% over the last 10 years, the USs S&P 500 had risen by 55% and the DAX had soared by a whopping 125%.
However, I would urge investors to think carefully about ditching their FTSE 100 trackers or S&P 500 trackers in favour of a DAX tracker on the basis of the these figures.
Heres why.
The shocking discovery I made when advising my in-laws (well, it was shocking to me and Im sure it will be to many readers too!) is that the DAX is the only major stock market index that includes reinvested dividends. What the DAXs whopping 125% gain and massive outperformance of the FTSE 100 and S&P 500 actually shows is the fantastic compounding power of dividend reinvestment.
The performance of the rarely-seen DAX Kursindex the capital-only version of the DAX, and thus the true equivalent of the FTSE 100 and S&P 500 is distinctly less impressive. It has lagged behind the S&P 500, although has still outperformed the Footsie, by a relatively modest degree.
In short, then, the grass is not always as green on the other side of the fence as it can sometimes appear. Switching out of your FTSE 100 or S&P 500 tracker into a DAX tracker may not deliver the stellar returns you might be anticipating.
The good news is that you don’t need to be a stock market genius or go hunting the world for the best possible returns to build your wealth and a secure financial future.
Indeed, our experts here at the Motley Fool have demonstrated that a seven-figure-sum stock portfolio is within the reach of many ordinary investors. All is revealed in our FREE wealth guide “10 Steps To Making A Million In The Market“.
To help you on the road to the magic million, you can download this FREE wealth guide now. There are no strings attached — simply click here for your copy.
G A Chester has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.