What is the best investment return? [video]

Discover the importance of long term financial planning

Can you afford to invest with confidence?

How predictable are market returns?

The financial markets are inherently uncertain. Markets react to random, unexpected events so, by their very nature, they are unpredictable — at least they are in the short term.

Equity markets in particular can fluctuate wildly. Of course, that doesn’t stop market pundits making predictions about where markets are heading. And the financial media loves market forecasts — not least because of its insatiable appetite for “stories”. But such predictions don’t bear close scrutiny.

Human beings — even so-called experts — are notoriously poor at predicting market movements. That said, long-term market returns are much more reliable. Nothing illustrates this better than the Periodic Table of Investment Returns, which was devised by Callan Associates in California.

The table shows the returns for ten different asset classes over a 20-year period. The asset classes are colour-coded, so you can track them over time. Each column illustrates the returns for a particular year. The asset classes with the biggest returns are at the top and those with the lowest are at the bottom. You’ll see from the mass of different colours that there are no discernible patters patterns.

Asset classes fall in and out of favour very suddenly. However, over the long term, asset class performance tends to revert to the mean. So, over the whole 20-year period, the average return for each asset class is more or less what you’d expect it to be. Yes, equity investors will inevitably have to contend with periods of extreme volatility.

For long periods their portfolios will be worth considerably less than they once were. But, as long as they resist temptation to bail out when their fellow investors take fright, they can expect to be rewarded eventually with far higher returns than for bonds. Similarly, over time, corporate bonds will generally return more than government bonds, which in turn will produce higher returns than cash.

In conclusion, then, it’s best to ignore short-term forecasts, have a highly diversified portfolio, sit tight and invest for the long term. Nobody knows what the markets will do next week, next month or even next year. But those with at least a 20-year horizon can afford to invest with confidence.

The information in this material is intended for the recipient’s background information and use only. It is provided in good faith and without any warranty or, representation as to accuracy or completeness. Information and opinions presented in this material have been obtained or derived from sources believed by AES to be reliable and AES has reasonable grounds to believe that all factual information herein is true as at the date of issue. It does not constitute investment advice, recommendation, or an offer of any services or products for sale and is not intended to provide a sufficient basis on which to make an investment decision. It is the responsibility of any persons wishing to make a purchase to inform themselves of and observe all applicable laws and regulations. Unauthorised reproduction or transmitting of this material is strictly prohibited. AES accepts no responsibility for loss arising from the use of the information contained herein.

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RISKS

Investments involve risks. The investment return and principal value of an investment may fluctuate so that an investment, when redeemed, may be worth more or less than the capital invested. Past performance is not a guarantee of future results. There is no guarantee strategies will be successful. For further information, please click here.

What is the best investment return? [video]

Discover the importance of long term financial planning

Can you afford to invest with confidence?

How predictable are market returns?

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