Expected return on medium-risk S&S ISA?

gavinm79

Hi all

First of all apologies for my ignorance and lack of knowledge. I am completely green and have been looking into different methods of saving and am quite confused.

If I were happy to invest in a medium risk S&S ISA over a long period (10years plus), what would be a reasonable annual return to expect on my investment - 4%?....6%?

I understand that no-one can predict how the markets will perform and each fund will perform differently but I would just like some kind of an idea - in the knowledge it could be way off the mark. Even if someone can estimate a range - ie. between x% and y%. Alternatively what level of returns have similar funds yielded in the LAST 10 years?

Thanks in advance.

Lokolo

Lowish risk I would think between 7-10%. Medium 10-13% and High anything above that.

dunstonh

Alternatively what level of returns have similar funds yielded in the LAST 10 years?

breakeven. Although the last decade saw two major events that were rare in a single decade, let alone two. Rare in the historical sense. Of course the next ten years are going to be nothing like the last 10 years or any 10 year period that has gone before.

gavinm79

lokolo - really? im surprised you say that high (pleasantly so!).

dunston - by breakeven do you mean returns in line with inflation?

cheers.

Linton

By choosing exactly 10 years you have managed to capture the highest point of the tech share bubble!

Now if you had said 7 or 15 Dunstonh's answer would have been very different.

Anyway Dunstonh has promised that it cant possibly happen again!!

jamesd

gavinm79, really. Have a look at Appendix C of the First Report of the Pensions Commission, which contains the after-inflation returns of different types of investment over different time periods. There's a lot of variation over five year periods but it smooths out as you increase the number of five year periods and the time. Over five year periods the mean return after inflation of the UK equity market since 1977 was 10.4% with a median of 11.5%.

So 10-13% before inflation is quite reasonable for a central plan. But you should plan for some of the less common cases and perhaps look at the twenty year range where there were two periods with a return below zero. Unlikely but it can happen. However, these assume that you have a fixed end point and stay in equities. In practice you can reduce the chance of the bad outcomes by:

1. Making regular contributions. Lots of different starting times and periods.
2. Switching to less volatile assets near any fixed end date
3. Being flexible about the end date so you don't sell in the future's equivalent of early March 2009 but instead in the March 2010 equivalent when much of the loss has been recovered.
4. Not sticking to only one country or one sector. You don't want to suffer if the UK market stays depressed and the rest of the world grows and you don't need to because you can invest almost anywhere.

Linton, it can happen again and the figures show how the returns have varied. But the first three approaches used to reduce the risk should work fine for almost all cases.

An exception would be a Japanese retiree who invested in Japan only during the years of boom and retired after the big drop that still hasn't ended a few decades later. But there's no requirement to invest in only one country and it's prudent not to, so that hypothetical unfortunate Japanese person would have had a way to suffer less. The fourth approach helps with this.

But there still aren't any guarantees.

gavinm79

cheers james, spot on that mate.

dunstonh

Anyway Dunstonh has promised that it cant possibly happen again!!

Only on the basis that no ten year period is ever the same and the whole world is changing. The US is no longer the emerging market it was in the 1900s. Western Europe is getting older. Japan is already there. You have india, china and other emerging markets taking over gradually. So, whilst some things are cyclical, the chances of the events of any 10 year period being repeated in the same way in the next 10 year period are highly unlikely.

ses6jwg

I have funds in my s&s which could be described as medium to high risk

I have owned them since august 2009 and in that time my total gains have fluctuated between 6% and 30%

currently at 12.5%

fg22

jamesd wrote: »

So 10-13% before inflation is quite reasonable for a central plan.

I'd suggest something lower for equities. A common assumption is 5-6% after inflation, with inflation about 3% this is a nominal return of about 8%. There are strong arguments to suggest that both future inflation and future real equity returns will be lower than historical rates. The following paper contains some useful stuff http://www.fsa.gov.uk/pages/Library/Communication/Statements/2007/projection_rates.shtml

jamesd

Personally for my own general planning I use 9% after fees, before inflation, which I assume to be 3%.

A more cautious view was used by the Pensions Commission, which used 3-4% after fees and inflation, in part based on an assumption that the investments would be in the UK and that demographic changes would cause reduced growth in the UK markets.

Not what I expect but it's about the minimum safety margin I want for financial planning.