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INVESTMENTS

Equity Market Risk

Introduction

Investment horizon is related to risk, especially for the equity market. If we look at the MSCI US Stocks for the period of 1970 till 2006 the average yearly return is 8.9%. More interesting is not so much the average performance, but the distribution of this performance.

Let's take a look at the highest and lowest average returns for 1 year, 5 year, 10 year and 20 year periods of investing in the MSCI US Stocks.

Statistical analysis of risk

Period	Highest	Lowest	Average
1 year	34.7%	-30.9%	8.85%
5 year	27.5%	- 5.1%	8.85%
10 year	17.5%	2.0%	10.38%
20 year	14.8%	7.0%	10.67%

Relationship to managing risk

The longer the holding period of equity, the less the risk of a negative average return

Investing for 1 year:

- Your return might be 35% or minus 31% or in between.

- Equity is a gamble for 1 year holding periods

- Risk of a negative return is substantial

- The short time horizon lowers average returns

Investing for 10 years:

- Your return might be between 2% and 18% on average

- Equity risk is acceptable

- Risk of a negative return is minimal

- The investment horizon on average produces 10% return

The longer the investment horizon, the lower the actual risks of equity investments. This is based on the MSCI US Stock performance from 1970 to 2006 and does not predict the actual return on any such time interval.