The Uncommon Average: Long-Term Context on Annual Returns
TUNING IN TO DIFFERENT FREQUENCIES
The Australian stock market has delivered an average annual return of around 13% since 1980. But short-term results may vary, and in any given period stock returns can be positive, negative, or flat. When setting expectations, it’s helpful to see the range of outcomes experienced by investors historically. For example, how often have the stock market’s annual returns actually aligned with its long-term average?
Exhibit 1 shows calendar year returns for the S&P/ASX 300 Index (Total Return) since 1980. The shaded band marks the historical average of 12.94%, plus or minus 2 percentage points. The S&P/ASX 300 Index had a return within this range in only four of the past 39 calendar years. In most years, the index’s return was outside of the range— often above or below by a wide margin—with no obvious pattern. For investors, the data highlight the importance of looking beyond average returns and being aware of the range of potential outcomes.
Exhibit 1
S&P/ASX 300 Index (Total Return) Annual Returns
1980–2018
In Australian dollars. S&P/ASX data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Indices are not available for direct investment. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment. Past performance is no guarantee of future results. Actual returns may be lower.
TUNING IN TO DIFFERENT FREQUENCIES
Despite the year-to-year volatility, investors can potentially increase their chances of having a positive outcome by maintaining a long-term focus. Exhibit 2 documents the historical frequency of positive returns over rolling periods of one, five, and 10 years in the Australian market. The data show that, while positive performance is never assured, investors’ odds improve over longer time horizons.
Exhibit 2
Frequency of Positive Returns in the S&P/ ASX 300 Index (Total Return)
Overlapping Periods: 1980– 2018
In Australian dollars. From January 1980–December 2018, there are 349 overlapping 10-year periods, 409 overlapping 5- year periods, and 457 overlapping 1-year periods. The first period starts in January 1980, the second period starts in February 1980, the third in March 1980, and so on. S&P/ASX data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Indices are not available for direct investment. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment. Past performance is no guarantee of future results. Actual returns may be lower.
CONCLUSIONS
While some investors might find it easy to stay the course in years with above average returns, periods of disappointing results may test an investor’s faith in equity markets. Being aware of the range of potential outcomes can help investors remain disciplined, which in the long term can increase the odds of a successful investment experience. What can help investors endure the ups and downs? While there is no silver bullet, understanding how markets work and trusting market prices are good starting points. An asset allocation that aligns with personal risk tolerances and investment goals is also valuable. By thoughtfully considering these and other issues, investors may be better prepared to stay focused on their long-term goals during different market environments.
The information contained in this article is general information only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision in respect to a financial product, you should seek advice from an appropriately qualified professional. We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser.
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Provided by: Dimensional. (2019) The Uncommon Average: Long-Term Context on Annual Returns. Available at: https://my.dimensional.com/the-uncommon-average