Your Average Return
An old joke goes - a statistician is a person who lays with his head in an oven and his feet in a freezer happily proclaiming “On average, I feel comfortable.”
Taking that example into the investment world, averages seldom reflect actual investor experience.
The global stock market has returned an average of 7% since 1970 as shown by the green dashed line.
Out of these past 51 years, only the returns of 1 year came close to the average of 7%.
That means that for a staggering 98% of the time, you would have experienced returns very different from the long term average. The annual returns have been as high as 47% and as low as -41%.
The issue is that most investors forget about volatility. For global stocks, the annualised standard deviation or volatility is approximately 14%. The table below shows what happens to returns when there is volatility.
You can see that 3 standard deviations more or less covers all the possible returns scenarios of global stocks; which is anywhere from -21% to +35%. Where markets are this year, with war, recession and inflation fears - it is likely that we will end up far from the average return.
So for investments which have high volatility or fluctuations - the chance that you end up quite wide from your expected return is high. To put things in perspective - the volatility of bank deposits is probably close to 0% whilst crypto is somewhere at 80%.
However for diversified assets like diversified global stocks, it is all part of investing. Eventually, your bad year(s) will be followed by good year(s) which brings your return close to the average again.
If you are concerned about your investments and markets in general:
I’ve experienced a large drawdown in my investments this year, what should I do?
How can I invest with a peace of mind such that I do not need to worry about my investments?
How do I know if I’m investing the right way?
If these and other worries are nagging away at you, come and chat with us.
Due to the unique market situation that we are in, we have specially dedicated a team to address such concerns. Click here to schedule a 30-minute pre-discovery sessions where we can have a chat with you to better understand your concerns.