Do you want to be Average?

I’ve recently received some interesting research from Dimensional which is attached to this post. Dimensional is the 8th largest fund manager looking after $576 billion assets under management and features prominently in the Wealth for Women portfolios.

Their research highlights that since 1970 (i.e. the last 49 years) global equities have produced an average return of 10% per annum. However, short term returns have varied significantly from the average.

Using the S&P 500 index (the largest 500 companies by capitalisation in the US market) they’ve highlighted that since 1926 only 6 of the 93 years had an annual return in the bracket from 8% to 12%.

In other words, for the vast majority of the years the returns were outside this range, sometimes by a significant margin (both up and down), and with no obvious pattern.

Returns in some years were as high as circa 55%, and as low as -45%, with no obvious pattern to the return.

Their research also shows that the longer you remain invested, the more likely you are to have a positive return. The probability of getting a positive return in 1 year over that 93 year period was 75%, but the probability of getting a positive return over a 10 year period was almost 95%.

What can we learn from this?
  • We need to be aware of the whole range of returns that can happen, rather than concentrate on any one year.
  • We also need to maintain a long term focus, to increase the probability of having a successful investment experience.

It’s easy to maintain an investment proposition when the markets are producing above average returns. It’s harder to do this when equity markets fall, and the results are disappointing.

That’s why it’s so important to have an investment philosophy and stick with it- rather than trying to chase the best fund or next best performing fund manager. The recent disaster with Neil Woodford is a great example of how this approach can fail.

The emoji guide to investing video above highlights that as investors, we need to accept markets will move up and down. It’s a natural part of the investing process. But rather than concentrating on each day’s movement and allowing that to dictate how we feel about our investment, we should work with our financial planner on a long term basis to ensure we are on track to meet our goals. If not, what action needs to be taken?

It doesn’t matter if that market is up, down or sideways. It’s whether we are on track to meet our goals and objectives that are relevant and should dictate the action we take.

If you have any comments on this and would like to discuss it further please do email me on [email protected] or leave a comment below.


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