In 2017 Australia experienced national rainfall 8% above average. While rainfall on a national basis was much higher than normal, the downfalls were concentrated to the west. In much of eastern Australia, including many fertile farmland areas, rainfall was well below average.Like farmers planning a harvest, investors placing their expectations on mathematical average returns will at different times be disappointed – market returns are rarely evenly distributed either across time or place.
Using some examples, in Australia from 1980 to end of 2017, the benchmark ASX 300 index has an annualised average return of 11.3%. Most investors would agree this is a solid return and if they stayed the course over time (stayed invested) they were well rewarded. It is interesting to note that within that +30 year period only in five individual years were returns within two percentage points of that average. Individual year performances range from as low as -38% to a high of 66%.
The US market is similar. Going all the way back to 1926, the S&P 500 has returned on average 10.2% in US dollar terms. In terms of individual year returns, only on six occasions during the nice decades was the return within 2 percentage points.
Just as rain can vary place to place, so too do market returns across both industries, sectors and countries. Using countries as an example, in 2015 the MSCI World index returned 11.5% (in $AUD terms). The individual country returns extended from a high of 38% for Denmark to as low as -14% for Canada. What about the following year 2016? Canada went from worst to best with a return of 25% while Denmark reversed to -15%. Again, this shows the difficulty in trying to predict.
As with weather forecasts, the financial ‘news’ and expert predictions do not necessarily assist with forecasting. Evidence shows how difficult it is to consistently and reliably forecast market returns from one year to the next, let alone one day to the next.
When investing, we suggest it is important to accept it is impossible to predict when or where the ‘rains’ will fall, and instead focus on building well-structured and diversified strategies to capture returns wherever they occur.