What Will Help You Achieve Returns: Time or Timing?

Chart of the Week for July 14-20, 2006

Some investors perceive that the expected annual return of stock investments should be 10%. Using the S&P 500 index as a proxy for the stock market, history supports this belief. The average annual return for the 80-year period between 1926-2005 is 10.36%.

Will investors receive 10% return every year? Not likely. There are a relatively small number of calendar years that the S&P 500 total return was within the range of 2% to 10%.

However, the longer the investment horizon is, the higher the probability an investor will actually realize the long-term average return of 10%. There have only been two 10-year periods in the last 71 rolling 10-year periods where the S&P 500 has delivered a negative result, back in the 1930s. Meanwhile, as the length of time measured increases, the range of realized returns becomes narrower. For instance, in measuring the actual results over 10-year periods since 1926, average returns ranged from negative 0.89 to positive 20.06%. As we can see from the above graph, this is significantly less volatile than one-year observations which range from negative 43.34% to positive 53.99% over the same 80-year time period. In addition, a longer investment horizon such as 20 years could further reduce return volatility as shown on the above chart.

Historically, by weathering the down years, investors eventually experienced good years. This increased the likelihood of obtaining the elusive 10% target and a gross result of doubling their investment approximately every 7 years. The chart shows us it is time in the market and not timing of the market that will help the average investor obtain the perceived average annual return of 10%.

* This illustration was compiled by information from outside sources which are not affiliated with ICMA-RC. This information is being provided for educational purposes and is not intended to be construed as or relied upon as investment advice. The ICMA-RC does not offer specific tax or legal advice. Individuals are advised to consider any new investment strategies carefully prior to implementing. Past performance does not guarantee future results. Investment returns and principal value will fluctuate, so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data illustrated. For performance data current to the most recent month end, contact ICMA-RC Services, LLC by calling 1-800-669-7400 or by writing to 777 North Capitol Street, NE, Washington, DC 20002-4240, or by visiting www.icmarc.org. Please consult both the current Vantagepoint Funds prospectus and MAKING SOUND INVESTMENT DECISIONS: A Retirement Investment Guide carefully for a complete summary of all fees, expenses, charges, financial highlights and investment objectives, risks and performance information prior to investing any money. Vantagepoint securities are distributed by ICMA-RC Services LLC, a broker dealer affiliate of ICMA-RC, member NASD/SIPC. For a current prospectus, contact ICMA-RC Services LLC, 777 North Capitol Street NE, Washington, DC 20002-4240. 1-800-669-7400. AC:0706-875.