As another year of returns have settled in this century I thought it would be an interesting idea to look back over those returns on a short and long run basis.
We hear a lot about the riskiness of markets, this is often due to short term declines that can often be sharp, and for some investors, very nerve wracking.
As we know there have been many of those since the beginning of 2000.
However, when sorting through returns on a monthly and yearly basis something becomes apparent – unless you had an extremely short term horizon, your likelihood of negative returns wasn’t high.
Yet these short run returns are regularly fired at us every morning and night on the news, while we only hear about the longer term as the year comes to an end.
How relevant are those short run returns that we hear more about and probably have a more consistent influence on our investment thinking?
We’ll start with the S&P/ASX 500 Accumulation Index, which includes reinvested dividends.
From the beginning of 2000 until the end of 2013 the total return was 199.48%, annualized at 8.15%, and across those 14 years there were three negative calendar years.
This made for a 21% chance of a negative yearly return, yet the monthly chance of a negative return over that period was 36%.
So the likelihood of having lost money over a shorter period increases by 71% – making the case to ignore short term movements and focus on long term investing.
For bonds, as measured by the UBS Australia Composite Bond Index, the total return was 142.76%, annualized at 6.54%.
There was a 26% chance of a negative monthly return or 44 negative months, yet over any calendar year bonds never lost money once.
Factor this in when considering your investment goals.
If you have a longer term horizon, worrying about market movements this month will most likely be pointless.
Peter Mancell is a director of Mancell Financial Group and FYG Planners AFSL/ACL 224543, www.mfg.com.au This information is general in nature and readers should seek professional advice specific to their circumstances. Looking to reach your goals with one of Australia’s highly rated financial advisors?
