News & Commentary

Out of the abyss: Vanguard reminds investors not to forget past lessons 18 Feb 10

Long term, realistic expectations order of the day in 2010

Investors should remember the lows, as well as the highs of the past year, and set realistic expectations when investing in 2010 according to Vanguard Investments Australia (Vanguard).

The share market surged over 50 per cent from its low in 2009 but investors need to maintain realistic long-term expectations about market returns to avoid the risk of becoming overconfident in the short term.

'What a difference a year makes. This time last year investors were staring into the abyss of one of the nastiest bear markets in 50 years. One year on, a resurgent share market has restored confidence, with investors returning to the market,' said Vanguard''s Head of Retail, Robin Bowerman.

With this restored confidence, one of the biggest risks is forgetting the important lessons which the crisis taught investors.'

According to Vanguard, the recent share market rally has proved the difficulty of market timing, while the extreme volatility – both with a falling then rising market - has shown the importance of taking a long term, well diversified approach to investing.

'At times of significant market volatility a long term plan and the discipline to stick to it are the basic techniques for taking some of the emotion and behavioural influences out of your investments,' said Vanguard''s Chief Investment Officer, Joe Brennan.

'The problem with trying to time the market is that it requires multiple low probability outcomes to go your way - when to invest, when to divest, then, when to re-invest.  Getting the timing right on any one of these decisions is difficult, let alone all three.'

The Vanguard index chart, which tracks the index return since 1970, reinforces the importance of setting realistic expectations over the long term. [You can download a copy of this chart or use an interactive version of this chart on the Vanguard website here]

Looking back at Australian shares over 20 and 30 year time periods (ending 30 June 2009), returns range from 9.2 to 12.7 per cent. But within such time periods the volatility or range of returns can be dramatic - anything from 80 to -40 per cent - which is why investors need to have a realistic time horizon.

Since 1950, the All Ordinaries Accumulation Index (which counts dividends reinvested as well as capital gain) has delivered a return of 12.5 per cent a year (to 30 September 2009), enough to turn an investment of $100 in 1950 into $113,856. Over time, the compounding of retained earnings results in capital gain through growth in the value of the shareholding.

'Past performance should not form the basis for future expectations and so investors need to make decisions based on realistic expectations of risk and return and be aware of what is within their control and what is uncontrollable. Unlike one-year performance numbers diversifying your investments across a sensible range of asset classes is firmly within every investor''s control. ' Mr Brennan said.