Waiting for the average return? Don't hold your breath
26 July 2017 | Asset classes
Commentary by Allie Carr, head of Retail Personal Experience, Vanguard UK.
When you're deciding on the right asset allocation to help you reach your goals, the expected returns of equities and bonds are key considerations.
What are those long-term returns; how much do they vary from one period to the next; and what should you do when prices move sharply?
Let's take a look at the United Kingdom equity market as an example. Using the calendar-year returns from the FTSE All Share Index over the past 30 years, the average annual return is 10.4%1.
The average return never happens
It's probably no surprise that the market never actually delivered the average return in any given year. What might be more surprising is that the market return was rarely anywhere near 10.4%. It only came within +/–5% of the average in six of the 30 years, or 20% of the time. Conversely, it was more than +/–10% away from the average in 18 of the 30 years – that's 60% of the time.
Markets are inherently volatile
This tells us that the equity market bounces around its long-term average by significant amounts from one year to the next. In fact, it bounces around significantly from one day to the next and sometimes from one hour or minute to the next.
The important investment lesson here is: ignore short-term market moves. All asset classes bounce around in the short term, but they all tend to produce characteristic returns over the long term.
Stay on course
If you have a good year, great – you might like to think about rebalancing into something that hasn't performed so well. And in a bad year? Stay calm. Consider rebalancing if your asset allocation has gone out of kilter, but remember your plan. Remember why you are invested the way you are. And don't let the short-term noise divert you from your course.
The market return is rarely close to the long-term average
Source: FactSet, based on calendar-year total returns in GBP.
Past performance is not a reliable indicator of future results.
1 Source: FactSet as at 31 December 2016, based on calendar-year total returns in GBP.
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