Some statistical averages enable us to neatly encapsulate the world. They provide us with context that can help us when planning our finances.
That a British woman or man who is 40 can on average expect to live another 43.7 or 40.4 years, respectively, for example, is a useful yardstick in early middle age when thinking about the money we might need in retirement1.
But some averages make less sense and are harder to apply, such as the 1.9 children that a British woman is on average meant to have2. Similarly, average stock-market returns don’t always give a good picture of what you might receive in any one year.
As our chart below shows, global shares – as represented by the FTSE All-World index – have delivered an average annual return since 1993 of 9.3% in sterling terms but have rarely delivered anything like that in any one year. Last year, for example, shares fell by 7.3%, while the year before they rose by 20%.
With the Bank of England’s base rate at 5.25% and potentially heading higher, it can be easy to compare a negative return like this with the returns available on cash. But making short-term comparisons like this can be misleading.
Market returns move around their averages from year to year – sometimes sharply, as in the case of shares. But while shares tend to bounce around more than bonds and cash, they also tend to return more than bonds and cash over the long-term.
So if you have a good year, great. But if it’s a bad year, stay calm.
The FTSE All-World index’s performance (1994-2022)
Past performance is not a reliable indicator of future results. Source: Factset, Vanguard calculations. Notes: Total returns in sterling terms with dividends reinvested. 31 December 1993 to 31 December 2022.
As you can see, global shares have often not delivered anything like the average market return in any one year. In fact, the annual return during this period only came within +/– 5 percentage points of the average on fewer than 1 in 4 occasions.
The chart underlines just how volatile stock markets can be. It also offers some context against which to consider the latest long-term average returns projected by Vanguard’s economists, which are shown below3. These projections are hypothetical in nature and based on the last running of the Vanguard Capital Markets Model® (VCMM).
Source: Vanguard. *These are nominal returns, so they don’t take inflation into account.
IMPORTANT: The projections or other information generated by the Vanguard Capital Markets Model regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Distribution of return outcomes from the VCMM are derived from 10,000 simulations for each modeled asset class. Simulations are as of 30 June 2023. Results from the model may vary with each use and over time. For more information, please see the ‘Investment risk information’ section.
Markets don’t move in straight lines
Market returns move around their averages from year to year – sometimes sharply, as we have seen. It’s why we favour a strategic approach to investing – one that uses low-cost funds and is shaped by people’s goals.
Both shares and bonds tend to jump around in the short term. But shares tend to bounce around by more while tending to return more in the long-term. Bonds, in turn, tend to return more than cash.
So you can adjust the amount of investment risk you are willing to take on by adjusting your mix of shares and bonds, in accordance with your goals. We call this ‘balance’ and it’s one of Vanguard’s four investment principles.
With different regions offering different opportunities, it is important also to make sure your investments are globally diversified, so you can exploit these opportunities in full while offsetting the potential for some investments to perform less well than others.
You may occasionally want to consider rebalancing your portfolio by selling investments that have performed well and using the proceeds to buy others that haven’t. This way your targeted ratio of shares and bonds, or ‘asset allocation’, stays the same.
But then you may be invested in a multi-asset fund that does this all for you, like our LifeStrategy range, or choose to invest via the Vanguard Managed ISA, where our experts do all the hard work for you.
The key thing always is to stay focused on your long-term investment plan and the goals you hope to fulfil by investing. Don't let the short-term noise divert you because the annual market return is rarely average.
1 National life tables: UK, Office for National Statistics, September 2021.
2 The Average’ Briton’, Office for National Statistics, 5 June 2018.
3 The figures are based on a 2-point range around the 50th percentile of the distribution of return outcomes for equities and a 1-point range around the 50th percentile for fixed income. Numbers in parentheses reflect median volatility.
Investment risk information
The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.
If you have any questions related to your investment decision or the suitability or appropriateness for you of the product[s] described in this article, please contact your financial adviser.
This article is designed for use by, and is directed only at, persons resident in the UK.
For further information on the fund's investment policies and risks, please refer to the prospectus of the UCITS and to the KIID before making any final investment decisions. The KIID for this fund is available, alongside the prospectus.
The information contained in this article is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so. The information in this article does not constitute legal, tax, or investment advice. You must not, therefore, rely on the content of this article when making any investment decisions.
The Authorised Corporate Director for Vanguard LifeStrategy® Funds ICVC is Vanguard Investments UK, Limited. Vanguard Asset Management, Limited is a distributor of Vanguard LifeStrategy Funds ICVC.
London Stock Exchange Group companies include FTSE International Limited ("FTSE"), Frank Russell Company ("Russell"), MTS Next Limited ("MTS"), and FTSE TMX Global Debt Capital Markets Inc. ("FTSE TMX"). All rights reserved. "FTSE®", "Russell®", "MTS®", "FTSE TMX®" and "FTSE Russell" and other service marks and trademarks related to the FTSE or Russell indexes are trademarks of the London Stock Exchange Group companies and are used by FTSE, MTS, FTSE TMX and Russell under license. All information is provided for information purposes only. No responsibility or liability can be accepted by the London Stock Exchange Group companies nor its licensors for any errors or for any loss from use of this publication. Neither the London Stock Exchange Group companies nor any of its licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the results to be obtained from the use of the FTSE Indexes or the fitness or suitability of the Indexes for any particular purpose to which they might be put.
Issued by Vanguard Asset Management Limited, which is authorised and regulated in the UK by the Financial Conduct Authority.
© 2023 Vanguard Asset Management Limited. All rights reserved.