Some statistical averages enable us to neatly encapsulate the world. They can provide us with context that may help us when planning our finances. That the ‘average’ British woman is a little over 40 years old and has another 48 years left to live, for example, is a useful yardstick for at least half the population. (For men, it’s 38.8 and 47 years, respectively.)
But some averages make less sense or resonate less widely, such as the 1.9 children that the average British woman is meant to have1.
‘Average’ market returns can also be deceptive. This is because it is highly unlikely that any one year will deliver an average market return, which presents a challenge when we’re trying to steer investors as to how markets might behave in the future.
To illustrate that, consider how global stock markets have performed over the last three decades using the FTSE All-World index as a proxy. The chart below shows both the calendar-year returns of this index in sterling terms as well as the average return (the dotted horizontal line) for the entire period.
The FTSE All-World index’s performance (1994-2021)
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 2021.
As you can see, global markets often don’t deliver anything approaching the average return of 9.9%. In fact, it was more than +/–10 percentage points away from this long-term average some six times out of every 10 years. And only came within +/–5% of the average seven times.
If anything, what the chart underlines is just how volatile markets can be – that is, just how much shares tend to bounce around their long-term averages from one year to the next.
It’s more food for thought at a time when markets have been struggling against a backdrop of rising inflation and rising interest rates, as well as war in Europe. And it provides another reminder of why it’s so important to remain focused on your long-term goals and to tune out any short-term distractions.
The chart above also offers some context against which to consider the current long-term returns projected by Vanguard’s economists2. These projections are hypothetical in nature and will change over time. But one thing seems clear and that is that we don’t expect average returns over the next decade to match the returns seen in previous decades.
Although we expect modestly higher inflation and a normalisation in interest rates over the next decade, it will not be enough to raise our returns forecast to historical averages. So, as it stands, we expect 10-year nominal returns to average between 3.9% and 5.9% per year in the case of UK shares and 3.0% to 5.0% per year in the case of non-UK shares.
That’s still significantly more than the return you’re likely to get on cash and good reason to invest your money, but it does present a dilemma if you’ve been planning your finances based on expectations of a continuation of recent returns: should you now rein in your goals or do you need increased the amount you save in order to get there?
Markets don’t move in straight lines
In general, simply extrapolating future results from the past isn’t a good idea. It’s why we favour a strategic approach to investing with low-cost funds and an asset allocation that matches people’s individual goals.
With different regions offering different opportunities, it is also important that investors follow a globally diversified approach to exploit these opportunities and offset the potential for some investments not to perform as expected.
Don’t forget, though, that all asset classes jump around in the short term but over the long-term shares tend to return more than bonds and bonds more than cash.
So if you have a good year, great – you might like to think about rebalancing or selling investments that have performed well and using the proceeds to buy others that haven’t. This means staying in line with the asset allocation (the blend of shares and bonds) you set out with at the outset. Or you may invest in a multi-asset fund that does this all for you, like our LifeStrategy range.
And in a bad year? Stay calm.
Stay focused on your long-term investment plan and the goals you are hoping to fulfil with your investing. And don't let the short-term noise divert you. The annual market return is rarely average.
1 ‘The Average’ Briton’, Office for National Statistics, 5 June 2018.
2 These are projections generated by the Vanguard Capital Markets Model® (VCCM) on 31 March 2022 and do not reflect actual investment results. They are not guarantees of future results. They are based on a statistical analysis of historical data. Future returns may behave differently from the historical patterns captured in the VCMM. More important, the VCMM may be underestimating extreme negative scenarios unobserved in the historical period on which the model estimation is based. The model forecasts distributions of future returns for a wide array of broad asset classes. The model generates a large set of simulated outcomes for each asset class over several time horizons. Forecasts are obtained by computing measures of central tendency in these simulations. Results produced by the tool will vary with each use and over time.
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.
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.
Issued by Vanguard Asset Management Limited, which is authorised and regulated in the UK by the Financial Conduct Authority.
© 2022 Vanguard Asset Management Limited. All rights reserved.