The power of “average”

When financial markets experience volatility, many investors obviously worry; but what are the real effects of a “volatile market”?

If you are a long-term investor, with a timeframe of five years or more, you cannot afford to overlook the benefits of growth investments such as shares or property. As an astute investor you will be aware of the fact that the value of these assets will vary over time – both up and down. However, if you have purchased a sound asset, whether it is shares or property, the price will generally rise over time.

When you invest in growth assets it is important to accept that you should be targeting an average rate of return. Some years you may achieve returns well in excess of your target, while in other years the return may be lower, and sometimes negative. If your targeted average is achieved over the longer term you will meet your objectives.

It is also important to note that different asset classes will outperform in different years. This is illustrated by looking at five major asset classes over the 10 years to June 2016. Frequently the asset class which outperformed in one year showed a poor, or even negative, return the following year. This illustrates the importance of having a diversified investment portfolio covering all the major asset classes.

Financial Year Returns for major asset classes:

     Year to 30 June      Cash Australian Fixed Interest Listed Property Trusts (Aust)
2007      6.4%      4.0%      25.9%
2008      7.4%     4.4%      -36.3%
2009      5.5%      10.8%      -42.3%
2010      3.9%      7.9%      20.4%
2011     5.0%      5.5%      5.8%
2012      4.7%      12.4%      11.0%
2013      3.3%      2.8%      24.2%
2014      2.7%      6.1%      11.1%
2015      2.6%      5.6%      20.3%
2016      2.2%      7.0%      24.6%
Average      4.4%      6.7%      6.5%
     Year to 30 June      Australian Shares      International Shares
2007      30.3%      7.8%
2008     -12.1%     -21.3%
2009     -22.1%     -16.3%
2010      13.8%       5.2%
2011      12.2%       2.7%
2012      -7.0%      -0.5%
2013      20.7%       33.1%
2014      17.6%       20.4%
2015       5.7%       25.2%
2016       2.0%       0.4%
Average       6.1%       5.7%

Source: Vanguard Interactive Index Chart. Note all figures shown are before fees and taxes.

Always remember…

  • Seek professional advice to choose appropriate investments for YOU. These should have been well researched for their financial soundness, whether they are individual investments or managed funds.
  • Be sure to have a portfolio which is diversified across major asset classes and subclasses. The balance of the portfolio should be designed to achieve your long term objectives at an acceptable level of volatility.
  • Don’t panic! It is human nature to be concerned when you see the value of your assets fall. However, markets eventually recover and a sound investment will perform over the longer term. Selling during a downturn will not help you achieve your objectives.
  • Don’t chase bubbles. When you see financial markets rising rapidly it is tempting to chase the latest “hot tip”. Invariably it is these that fall the furthest.
  • Review your portfolio at least annually to ensure it is still appropriate to your objectives and market conditions.

Note: past performance is not an indicator of future results.

To find out more, please always feel welcome to contact us at any time.

General Advice Disclaimer

This article contains general advice only, which has been prepared without taking into account the objectives, financial situation or needs of any person. You should, therefore, consider the appropriateness of the information in light of your own objectives, financial situation or needs and read all relevant Product Disclosure Statements before acting on the information. Whilst every care has been taken to ensure the accuracy of the material, Paradigm Strategic Planning or WealthSure Financial Services Pty Ltd will not bear responsibility or liability for any action taken by any person, persons or organisation on the purported basis of information contained herein. Without limiting the generality of the foregoing, no person, persons or organisation should invest monies or take action on reliance of the material contained herein but instead should satisfy themselves independently of the appropriateness of such action.

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