Are Averages Normal? Fisher Investments UK Reviews

What is a reasonable equity market return to expect in a given year? 5%? 10%? 20%? Based on Fisher Investments UK’s reviews of financial publications and opinions, many investors cite figures ranging from high single digits to low double digits, based on stocks’ long-term historical average.[i] Whilst the logic behind that thinking is understandable, investors don’t benefit from using averages in that manner, in our view. Let us explain.

Based on Fisher Investments UK’s reviews of popular market topics, many people imply the average is the typical result. If something is outside that average, then it is atypical – in either a good or bad way. For instance, we have observed many analysts treating stocks’ historical average return as a guide for future returns. At the start of every year, Fisher Investments UK reviews investment professionals’ publicly available market forecasts to get a sense of consensus and popular opinions. Based on years of performing this study, we have found the majority of forecasts rarely stray far from average, clustering around stocks’ long-term historical figure (give or take). We have also seen market professionals weigh the average return associated with a selected type of historical event – e.g. the average return 6 or 12 months from monetary policymakers’ rate hikes – and presume that constitutes the normal market reaction.

Whilst Fisher Investments UK thinks history has its uses in investment decision-making, there is a flaw in this argument, in our view: averages simply reflect a very high-level look at what happened. Yet what happened can be volatile in the short term, whether on a weekly, monthly or even year-to-year basis – a critical detail averages may gloss over by blending extremes together.

Consider the US-based S&P 500 Index in dollars, which we use here for its long historical dataset. From 1926 to 2021, the S&P 500’s average annualised return in US dollars is 10.3% (an annualised return is the compound annual growth rate that would deliver the cumulative return over a given period).[ii] But this doesn’t mean US stocks delivered 10.3% year in, year out. As Exhibit 1 shows, annual returns varied greatly. The S&P 500 delivered positive returns in nearly 75% of the past 96 years – and close to double the annualised average, 38% of the time.

Exhibit 1: S&P 500 Annual Returns Since 1926

Source: Global Financial Data, as of 28/03/2022. S&P 500 Total Return Index, in USD, 31/12/1925–31/12/2021. Currency fluctuations between the dollar and the pound may result in higher or lower investment returns.

It is a similar case for global equities: the historical average isn’t a typical, or even very common, return on a year-to-year basis. (Exhibit 2)

Exhibit 2: MSCI World Annual Returns Since 1970

Source: FactSet, as of 07/09/2022. MSCI World Index returns with net dividends, in GBP, 31/12/1970–31/12/2021.

To illustrate just how uncommon average is, consider: since 1970, there have been only 7 years in which the MSCI World delivered returns within 3 percentage points of (above or below) its average annualised return of 10.4%.[iii] Said another way, global stocks weren’t close to their average return 87% of the time.

In Fisher Investments UK’s view, this understanding can help investors set reasonable return expectations. For example, recognising average isn’t typical can discourage the thinking stocks will deliver their historic average consistently, which is a rarer occurrence than many investors realise. Fathoming this historical fact can help investors avoid being caught off guard by a big positive return (or flat or even negative returns), as we think they will be less inclined to see such big or negative years as historical anomalies.

Understanding average isn’t typical can also help investors challenge claims of investment products or services that purport to deliver the stock market’s average consistently and smoothly every year. Since history shows annual market returns are variable, something that alleges to provide a positive, steady return regardless of market environment is incorrect, in our view – or, worse, a scam.

In Fisher Investments UK’s reviews of investor behaviour, a key to long-term success is thinking differently than the consensus. Understanding historic averages aren’t usual is part of that, allowing investors to challenge conventional wisdom and find opportunities others may overlook.

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This document constitutes the general views of Fisher Investments UK and should not be regarded as personalised investment or tax advice or a reflection of client performance. No assurances are made that Fisher Investments UK will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. Nothing herein is intended to be a recommendation or forecast of market conditions. Rather, it is intended to illustrate a point. Current and future markets may differ significantly from those illustrated here. In addition, no assurances are made regarding the accuracy of any assumptions made in any illustrations herein. Fisher Investments Europe Limited, trading as Fisher Investments UK, is authorised and regulated by the UK Financial Conduct Authority (FCA Number 191609) and is registered in England (Company Number 3850593). Fisher Investments Europe Limited has its registered office at: Level 18, One Canada Square, Canary Wharf, London, E14 5AX, United Kingdom. Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission.

Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission. Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.

[i] Source: FactSet, as of 07/09/2022. MSCI World Index returns with net dividends, in USD, 1970–2021. Currency fluctuations between the dollar and the pound may result in higher or lower investment returns.

[ii] Source: Global Financial Data, as of 28/03/2022. S&P Total Return Index, in USD, 31/12/1925–31/12/2021. Currency fluctuations between the dollar and the pound may result in higher or lower investment returns.

[iii] Source: FactSet, as of 07/09/2022. MSCI World Index returns with net dividends, in GBP, 1970–2021.