There is no such thing as a typical year when it comes to making investments
THE world around us is constantly changing, but does that mean we have to adapt or alter our behaviour to these events and, if so, by how much?
The answer is probably not by a great deal because it becomes natural to just go with the flow and accept that life is never really constant.
Is investing any different? With innumerable events occurring across the world affecting economies and markets in different ways every day, should we really expect to earn the same consistent returns from our investments year after year?
Or, in other words, is there such a thing as a typical year when it comes to making investments?
In a word, no: past performance, as the mantra goes, is not a reliable guide to future performance.
What is more, when you study historical investment returns it quickly becomes clear that they can vary significantly from year to year.
Despite this, many investors continue to hold certain expectations around the annual return they are likely to get from their investment portfolio.
This is a mistake and the inevitably results in dissatisfaction.
Work in behavioural finance has shown that in the world of investing it is those deviations from expectations that lead to happy or unhappy investors.
Getting better returns than expected creates happiness on the part of the investor while making a lower return than expected makes for unhappy investors.
It may feel appealing to judge each year in this way, but to do so misunderstands one of the essential effects of the investment time horizon.
An average year is, by definition, made up of both good and bad previous years. The reality is that almost no single year will provide you with average returns across each asset class.
Indeed, an examination of annual US share and bond returns over the past 90 years highlights a very broad dispersal of returns, with just a handful of years when returns are within a small distance of their long-run averages.
Incidentally, the “most average” year over that 90-year timeframe would be 2004.
Over longer periods of time, this dispersal of returns reduces and reverts closer to that average return.
Investing for the long run as well as looking at longer periods of return may now seem less daunting and more sensible, again reiterating that there is no typical average year.
When it comes to investing, time really is your friend, which is why it is suggested that you should invest for a minimum five-year time period.
While diversification reduces the volatility of a fund, there is a way to help you control your own perceptions of volatility and return.
In the same way that increasing your investment horizon reduces the probability of making a loss, checking your investments less often reduces the perception of riskiness that seeing red numbers can bring about.
That in turn will decrease the probability of you not being able to achieve the average return you envisaged.
The variability of returns is an unavoidable feature of making investments.
Some years you will see very strong returns, in some the opposite will be the case and in others
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your portfolio may appear to be rather average.
Do not beat yourself up about that, though. It is worth remembering that it is the returns that you make over longer periods of time that are important, not the short-term falls.
Staying the course will increase the likelihood that your returns will look like the averages, which have been positive and better than cash.
That said, it is worth remembering that this cannot be guaranteed.
Indeed, investments can fall as well as rise, although as we explain above, staying invested for the longer term will help reduce the chance of you losing money.
If you are itching to change your fund during periods of significant returns, a strategy some follow is to sell a bit of an individual asset when it is
Craig Jamieson is regional director at Barclays Wealth Management in Scotland and Northern Ireland.