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Why you need to target a return of 8% to 11%

Perhaps the simplest way to get exposure to Australian equities is to buy an Exchange Traded Fund (ETF), such as STW from State Street that is a mimic of the S&P/ASX 200. Alternatively, there are index-tracking managed funds such as those provided by Vanguard Fees are very low on these products compared to an actively managed fund that seeks to outperform the benchmark index. So what return should an investor expect?

The long run

In any given year, it is very hard to predict the return on the index. However, over longer periods, the task gets a bit easier. Since data on the ASX 200 only goes back to 1992, I have analysed data on the All Ordinaries in Table 1 back to 1962. The All Ordinaries comprises the ASX 200 plus about 300 smaller capitalised stocks listed on the same exchange. In the left hand panel of Table 1, I have averaged the capital gains (that is excluding dividends) in periods all ending in December 2013 but with differing lengths of data.

Table 1: Average historical growth rates on the All Ordinaries