Investing Is For The Long Term – An Example

Investing (by definition) is an activity that should be undertaken over the long term. Although it is important to track the performance of investments worrying too much about short term losses can be counterproductive.

As an example, let’s look at the risk and return from three common investment categories (as defined by the Institute of Management Accountants – IMA) over periods of three, five, ten and twenty years. For simplicity, we have labelled the categories, cautious, balanced and growth.

Mixed 0-35% Shares – Cautious

Mixed 20-60% Shares – Balanced

Mixed 40-85% Shares – Growth

Where 20-60% Shares means between 20% and 60% of the fund must be invested in shares (equities) with the balance spread across other asset groups.

Over the three year period (Oct 2014 – Oct 2017) the Growth fund performed best with Cautious performing worst. Although returns over the period were between five and seven percent it is important to be aware of short term volatility. Investment returns fell significantly in September 2015 before recovering from February 2016 onwards.

Over the five year period (Oct 2012 onwards) the Growth fund again performed best but again with some volatility. A short term view some may persuade some the growth category is the best choice. Analysis of the 10 year graph (see below) may lead others to be more cautious.

The dramatic credit crunch in 2008/09 saw portfolios falling between fifteen and thirty percent over the 18 months from Sept 2007. The period Oct 2008 to Oct 2009 illustrates the maximum loss for each category. As may be expected the Growth fund showed the highest drop over that period.

The impact on the Growth category between 2008 and 2009 may not be a major issue for any investor holding their investment into 2010 and beyond but for those making withdrawals or taking income in late 2008 it would represent a substantial loss on investment gains made in previous years.

The twenty year graph illustrates the ups and downs over time. The late 1990s saw good returns only for them to be given up in the early 2000’s. The lower risk balanced sector did well in the first decade but the higher risk sector was the winner in the second decade. Long run returns have been a little under 5% pa (after fund costs) for the balanced category.

Cautious investors may think that the lower risk/volatility is worth the lower long term returns. A more bullish investor may feel investment growth over the past 5 years makes the growth category a better choice. However, it is important to remember the standard warning on any investment ‘The value of your investments can go down as well as up and you may get back less than you originally invested.’ Nobody can predict what the future may hold.


Past performance is no guarantee of future returns. This blog is intended to provide a general review of certain topics and its purpose is to inform but NOT to recommend or support any specific investment or course of action.