Long Term Investment and Averaging


Financial planners are fond of using the phrase “long term” when talking about investing. It is a concept based upon an awful lot of research and analysis of markets, investor behaviour and trends. However, the phrase quite rightly gets questioned every time there is a significant fall in markets.

A lot of people worry about the impact of falls in value on their retirement nest eggs, and after a large fall (especially when in what may have been considered a “balanced” portfolio) it is logical to wonder if the values will ever lift back to where they were.

A great deal of this worry is really just “noise” and a reflection of the news headlines of the day. This may sound flippant in the face of the 30%+ falls suffered by markets recently (where Australian shares need a ~50% lift to return to the November 2007 high point) but it is important to stay focussed on the long term during periods of instability. This is often where the returns of the next 10 years are best consolidated.

To illustrate this in more detail, we are going to look at the Dow Jones Industrial Index – the most commonly quoted measure of the movement of prices in American sharemarkets (even though the index only represents the top 30 companies, whereas other indexes may measure as many as 10,000 companies).  We are going to look at one of the listed investment funds (called ETF’s) that was available for investors to purchase more than 10 years ago, so that we can look at genuinely achievable results.

There is a term being used in financial circles in the US – it’s “the lost decade” – in other words, investors have seen no return from their money in over 10 years. When you hear this term, it brings to mind a zero return for all investors over that period. And yet this is not necessarily the case. It is certainly true of a single lump sum investment made at an equivalent price but most people do not make one single purchase – they tend to accumulate assets over an extended period – more when they have surplus income or access to cash and less when they don’t. So you would expect a more correct look at long term returns would include a look at how purchases over a time period would have worked out.

Here is a chart of the movement in price of that share (based on the Dow index) and how it has changed over the past 12 years. For the sake of simplicity, we are going to ignore the very real value of the dividends that would have been received along the way, and focus on the capital values. What are some of the points that you can make out from this chart?

Firstly, it can be seen that the return in the period to 28 September 2010 is zero if measured from April 1999. There was a rapid increase in the market in 1998, so if we look at the full period of time this investment was available then we can see that there is actually a 40.99% increase (over the full period – remember that only works out to around 2.73% pa if annualised, so it is not as good as it initially sounds…).

Secondly, we can see that there were a few quite specific times between 1999 and 2002 when any purchases made would be of a lower value today (again, ignoring dividends). There is also a solid block of time between 2006 and 2008 when all purchases made would be of lower value today (possibly even with dividends included).

However, we can also see that for the bulk of the time being measured, any purchases made are likely to have been at lower values than today, with the result that those purchases would have a higher value today.

Thirdly, we can see that a person who may have started placing much larger amounts of money into their investment (in the period beween 2006 and 2008) would most likely have NOT made money overall during the total period considered by the graph.

Now here is a neat idea…

Wouldn’t it be great if your super fund provided you with a chart of when your money was invested into different areas (something like the chart above), so a person could quickly gauge how their return has come about? It’s actually much harder to do than to say but such things are possible, and would help explain long term returns far better than a bland statement that your return over the past 10 years has been 2.7% or some other such hard-to-interpret comment.

I wouldn’t hold my breath on reports becoming much easier to read while there is such an intense focus on fees and costs and other such things but it is nice to dream a little, isn’t it..?


  • The investment mentioned in the post is an “ETF” or exchange traded fund. The Australian Stock Exchange website includes very good information on what these securities are and how they work. For the purposes of this post, we can consider them single shares that act like a listed managed fund, in that the one share will include exposure to a number of individual companies and securities.
  • The particular ETF is listed in the United States under the code DIA. Yahoo Finance provides excellent free interactive charts on securities such as this.


WARNING : Please remember the golden rule of this site – none of the comment provided in this post or anywhere else on this site, is to be considered personal advice. It is commentary of a general nature only. You must not take any investment action based on the content of this post or site without seeking a professional assessment of your personal position, objectives and attitudes to risk. Especially remember that past results are not a guarantee (and sometimes not even an indicator!) of future performance and care should always be taken when trying to interpret past results. A quick visit to the website of the government regulator ASIC, will provide you with more warnings on this issue and clarification of what is and is not advice (along with further information on return expectations generally).


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