We all want to be prepared for the future, investing is part of our preparation. When making our plans, we typically have expectations of what reward we should receive for the risks we take. But share performance is inherently uncertain, so how can we plan ahead?

Let's look at the year-by-year performance and try to gain some insights.

An Uncommon Average

How often is any given year an average year?

When investing in shares, the range of outcomes for a single year is large. Each year is rarely close to the average. To illustrate this, we used the calendar year returns from 1992 - 2018 (27 years) for a portfolio of shares. We used long-term benchmarks for our current portfolio models.

The average annual return for this period was 9.9%. But of the 27 years, only 5 were within +/-2% of this average (between 7.9% and 11.9%). This means more than 80% of outcomes were 2% above or below the average. The following graph shows the returns for each year.

For a balanced portfolio, with 60% shares and 40% bonds, the average return was 8.2%. We can see the range of returns is narrower, but still only 5 out of 27 years fall between 2% above or below the average.

Time is Your Friend

The range of returns narrows over time

We expect returns will get closer to the average over time. Within the time frame above, we can look at the best and worst returns over a variety of time periods. Below is a graph of the range of returns over 1 year, 3 years, 5 years and 10 years for our portfolio of shares.

For the balanced portfolio, the ranges are narrower. Again there is a less uncertainty over time.

Long-term Perspectives

Accepting year-to-year volatility for long-term results

While we use long-term averages to plan for the future, we also accept short-term returns seldom fall close to these averages. Years of poor performance are a part of investment as much as years of strong performance. Looking at performance over longer time frames, the results speak for themselves.