Expectations For Capital Market Returns

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Expectations For Capital Market Returns

  1. 1. RES-4869-U JUL 2009 Page 1 of 2 U K S t r a t e g y r e p o r t expectationS for capital MarKet retUrnS When you invest, you’d like to know what you’ll receive in the future: the return on your investment. Unfortunately, we can’t accurately predict future investment returns. However, using the past performance of different investments and current conditions, we can make some assumptions about the range of likely future returns. The Edward Jones Investment Policy Committee (IPC) recently reviewed current capital market assumptions and concluded equity returns are likely to be slightly higher, whilst fixed income and inflation are slightly below the range of long-term historical returns. The long-term annual rate of return on the FTSE All-Share Our capital market assumptions are designed to assist was 8.3% per year between 1988 and 2008, somewhat you and your financial adviser when: lower than its performance over longer times. As a result ❚❚ Selecting a portfolio objective of the severe decline in the stock market, the outlook for ❚❚ Determining the appropriate withdrawal rate UK equity returns is higher. Our expectation is for long- term equity returns in the range of 10% – 12% per ❚❚ Discussing other decisions to help achieve your annum, and long-term fixed-income returns averaging long-term financial goals 5.5% – 6.5% per annum. As a result, if your portfolio is Whilst past performance does not indicate future split evenly between equities and fixed income, its results, the guidance combines our views on the current average annual return range is 7% – 9%. environment with long-term historical performance. Portfolio Objectives Each portfolio objective is a mix of shares and fixed-income investments designed to reflect your comfort with risk and your investment time frame. The capital market assumptions are for markets in general. We have taken the recommended mix of assets for each portfolio objective to estimate the range of annualised returns you might expect if you own your investments for 10 years or more. Remember, however, each year’s returns are generally going to be quite different from the long-term averages suggested below. Balanced Balanced Balanced Preservation towards Growth & towards All-equity portfolio objective of Principal Income Focus Income Income Growth Growth Focus Focus Range of Expected 3% – 5% 5% –7.5% 6% – 8.5% 7% – 9% 8% – 10% 8% – 11% 10% – 12% Long-term Portfolio Returns Risk and Return Looking at 10 years or longer, diversified equity UK Market Perspective 1970 – 2008 investments have almost always provided higher returns £1,000 than fixed-income investments (bonds), and fixed-income Compound annual return UK shares 11.5% investments generally provide higher long-term returns £100 Bonds 9.7 than cash investments, such as savings accounts. In Savings accounts 8.5 £69 contrast, the variation of returns from year to year £37 Inflation 6.6 historically has been highest for equity investments £24 £10 and lower for fixed-income investments. £12 The higher returns from owning shares over time tend to compensate investors for tolerating fluctuations in the £1 value of their portfolios. Most investors own portfolios that include these three asset classes (equities, fixed income £0.10 and cash) to provide a combination of relatively stable 1970 1980 1990 2000 returns with those that vary more greatly. All values are represented in GBP. Past performance is not a guarantee of future results. Hypothetical value of £1 invested at the beginning of 1970. Assumes reinvestment of income and no transaction costs or taxes. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2009 Morningstar, Inc. All rights reserved. 1/4/2009
  2. 2. RES-4869-U JUL 2009 Page 2 of 2 How Edward Jones Makes Capital Market Assumptions Inflation The Edward Jones IPC reviews the assumptions about One of the biggest risks for long-term investors is inflation capital markets semiannually. These assumptions are (or rising prices). Whilst inflation has averaged 4.1% since designed for current investments, so they take into account 1980, it has ranged from a low of just under 1% to over the current environment as well as the historical performance 16%. The 2009 recession is likely to keep price increases of various assets. They are based on: subdued over the next few years, but thereafter we expect a ❚❚ Inflation rates return to moderately low inflation, similar to the recent past. Our expectation is for inflation to average 3.0% per year ❚❚ Dividend yields on UK and foreign equities over the next decade. Investments that provide rising ❚❚ Expected growth rates of earnings and dividends income help address the impact of inflation. ❚❚ Price-to-earnings ratios (or price-to-dividend ratios) How Much Should Capital Market Assumptions ❚❚ Current interest rates on fixed-income investments Change over Time? ❚❚ Historical relationship among various investments We think the range of expectations about future investment returns should not change very much over time. From Our current assumptions are: year to year, stock market prices and current interest rates Inflation: 3.0% typically vary widely, but good and bad short-term Equities: 10% – 12% performance tends to average out over time. As a result, Long-term fixed income: 5.5% – 6.5% longer-term returns vary much less widely, as shown below for the returns of the FTSE All-Share Index from Cash: 3.0% 1963 to 2008. The first histogram shows one-year returns, As a result, if your portfolio is split evenly between equities which ranged from a decline of more than 40% to returns and fixed income, its average annual return range is 7% – 9%. of more than 40%. The 10-year annualised returns are mostly clustered together between 0% and 25%. FTSE All-Share Index Total Return 1963 – 2008 One-year Total Return 2003 Source: Bloomberg, Edward Jones 2004 1999 1998 1997 2000 2007 1988 2005 1995 1993 1977 1994 2006 1981 1996 1992 1986 1989 1975 2008 2001 1990 1970 1987 1979 1972 1991 1983 1980 1971 1974 1973 2002 1969 1964 1966 1976 1978 1965 1963 1985 1982 1984 1967 1968 Return Less than -35% -30% -25% -20% -15% -10% -5% 0% 5% 10% 15% 20% 25% 30% 35% 40% More than Band -40% -40% -35% -30% -25% -20% -15% -10% -5% 0% 5% 10% 15% 20% 25% 30% 35% 40% 10-year Annualised Total Return 92-01 90-99 Source: Bloomberg, Edward Jones 98-07 87-96 91-00 97-06 85-94 89-98 96-05 73-82 88-97 95-04 72-81 86-95 94-03 71-80 84-93 80-89 93-02 70-79 83-92 79-88 69-78 68-77 82-91 78-87 99-08 66-75 67-76 81-90 77-86 65-74 64-73 63-72 74-83 76-85 75-84 Return Less than -35% -30% -25% -20% -15% -10% -5% 0% 5% 10% 15% 20% 25% 30% 35% 40% More than Band -40% -40% -35% -30% -25% -20% -15% -10% -5% 0% 5% 10% 15% 20% 25% 30% 35% 40% Investors who are taking income from their investments need to pay particular attention to the variability of their portfolios. The withdrawal rate needs to be considerably less than the long-term expected return on the portfolio to reduce the chances of running out of money. After a severe decline in equities, withdrawals make the portfolio’s recovery more difficult, since less remains invested. Recommendations As you review your portfolio with your Edward Jones financial adviser, keep in mind that you need a long-term investment strategy to help you receive the long-term returns available in the market. Many investors fail to earn those returns because they trade frequently and switch strategies at the wrong times — usually selling investments that have declined and buying those that have already risen. Our advice is to build a well-diversified portfolio with the mix of quality investments tailored for your situation, review it periodically to ensure it remains appropriately balanced and stay invested over time. This approach has helped investors on the path towards their financial goals in the past, and we think it will work for you as well. Edward Jones Limited is authorised and regulated by the Financial Services Authority and is a member of the London Stock Exchange. Registered in England and Wales No. 3403976. 11 Westferry Circus, Canary Wharf, London, E14 4HH. © 2009. Kate Warne, ph.D., cfa Market Strategist www.edwardjones.com

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