(Example using the
Kuala Lumpur Composite Index - KLCI is used)
In October 1988 after the infamous
October 17 Crash of the Dow, the KLCI-80 Index (it comprised 80 stocks
then) registered a low of 222 points. The KLCI-100 Index (the index was
adjusted to comprise 100 stocks in 1990) rose to a high of 1333 on January
The Asian Financial Crisis collapsed the
market to a low of 262 points in September 1998. It has since recovered
to around 950 points in April, 2000.
From these numbers, it can be seen that
from the October 1987 low to the high of January 1994, the KLCI recorded
an absolute return of 600 per cent over the period of 6 years and 3 months.
This translates into an annual compounded return of 33.0 per cent.
In the same way, the compounded annual
return from September 1999 to March 2000 (a 17 month period) when the market
rose from 262 points to 950 points, it increased by an absolute 362 per
cent over the period or at an astounding compound rate of 115 per cent.
In terms of risk, if you had invested in
January 1994 when the index was around 1300 points and kept your investments
till September 1998 when the index fell to approximately 260 points, you
would have had paper losses of around 80 per cent.
A benchmark is therefore a very useful
marker for tracking investment returns and risks. Hence, knowing how the
index reacts to changes in its component stocks is critical to the success
of benchmark investing.
To learn more on index or benchmark investing,
please click under the Investment Strategies Section (