Understanding evidence-based investing

Evidence based investing relies on evidence that in the long run the market will drive returns for investors. There is a wealth of data and research on markets, which highlights the importance of having a long-term perspective and remaining invested, particularly when markets are volatile.

This data shows that despite recessions, periods of stock market volatility and geopolitical unrest, the global equity market has delivered attractive returns for investors over the long term. The global equity market has returned 7.5% per annum over the past 30 years. With a return of 7.5% per annum, you double your money every 10 years. Bearing in mind that during this period we encountered the global financial crisis, the impact of covid and more recently, the aggressive rate hiking by central banks in 2022 to curb inflation.

Long-term global equity performance¹

The data also suggests that the longer your time horizon, your probability of making money increases. The chart below is constructed using the returns from the S&P 500 over the past 95 years and shows the rolling return over different investment horizons, from 1 year to 20 years. Over a rolling one-year period, you made money 73% of the time and lost money 27% of the time. Over a rolling five-year period, you made money 87% of the time and over a rolling 20-year time horizon, you made money 100% of the time. Your probability of earning a positive return is positively correlated with your investment horizon, meaning as your investment horizon increases, so does your probability of generating positive returns.

 

While the long-term numbers are impressive, many investors are still risk averse and don’t like periods where markets decline, even if short lived. It is important to remember that markets generally bounce back strongly following large declines. The graph below shows the largest drawdowns (peak to trough declines) of the S&P 500 over the past 60 years and the returns for the 12 months following each drawdown. The returns have been very strong over the 12 months that followed sharp market falls. For example, during the global financial crisis, the market fell by 57%. In the year following this drawdown, the market rose by 68%. If an investor were to sell out of the market after the drawdown, they would crystallise this loss and potentially lose out on a significant amount of the following recovery.

Crisis and recovery: how the S&P 500 index has performed during and after historic events²

Timing the market is exceedingly difficult, even for seasoned investors and missing even a small proportion of this recovery can have a material impact on your capital. For example, if you invested €10,000 in the S&P500 in 1988, by the end of 2023, you would have €418,000, assuming you were invested for the entire period. If you just missed the five best days over the period, your capital value would be €264,000 and if you missed the best 40 days, you would only have €44,750 at the end of the period.

S&P 500 – Growth of 10,000 from 1988 to 2024³ and the effect of missing the best days 

Aviva’s Fixed Allocation Funds

Aviva’s Fixed Allocation Funds are built upon evidence-based investing, which emphasises the importance of having a long-term perspective and remaining invested, illustrated by the examples in this article. This approach has the added benefit of being easy to understand and explain to clients. Here are some other reasons to invest:

1. Easy to understand

The Fixed Funds take a straightforward approach to investing in financial markets. They are simply trying to provide market like returns for an investment in a mix of global equities and bonds and to do this in a transparent and consistent manner, all managed within a passive framework.

2. Consistent performance

Investment returns remain a key driver for the Fixed Funds and long-term performance of the Funds is competitive with many active peers in the market, this coupled with their consistency of delivering market like returns has made them a popular choice for investors.

3. Low-cost approach

As the investment style of the fund range is passive, and the asset allocation is fixed (rebalanced on a monthly basis) this leads to the fund management cost being -0.10% lower than standard fees.

 

Learn more about the benefits of long-term investing at avivabroker.ie/long-term-investing.

 

<sup>1. Source: Aviva Investors/Lipper as of 31 December 2024, MSCI World Index (NR, Local).
2. Source: Aviva Investors, Lipper, a Thomson Reuters company, as of 31 December 2024. Data used S&P 500 CR USD.</sup>

^{3. Source: Aviva Investor & Bloomberg, as at 31 December 2024. Data used S&P 500 TR USD.}