Where should you invest for the next 10 years? After 2016's political upsets, investors are now faced with one of the most uncertain outlooks for a long time. Not only do they have political uncertainty to contend with, but there's also the issue of sluggish economic growth in developed markets, record low interest rates and premium market valuations weighing on market sentiment.
All of these factors are causing City forecasters to warn that investors will have to get used to very low returns from equities over the next few years. Returns of around 4% per annum are expected, including dividends, down from a historic return of approximately 9% per annum.
In this environment, a long-term perspective will be required. As we've seen this year, uncertainty creates erratic markets, and while there may be gains to be had from trading in and out of stocks, there's plenty of evidence to show that this approach rarely works. Instead, it's often best for investors to hold on and keep a calm head through the uncertainty.
4% is still attractive
A prospective return of 4% per annum from equities over the next 10 years may not seem like a huge amount, but it's a lot more than the average interest rate on UK savings accounts, which currently sits at 0.9%.
Nonetheless, even though the City expects market returns to be half of their historic average for the next decade, there's no guarantee that this will be the case. Over the past year, with Brexit and Trump we've seen how off the mark forecasts can be because they're only predictions. This has always been the case, and investors would do well not to hang on every forecaster's word.
Still, it's difficult to see how the markets can move much higher from current levels. Earnings growth is sluggish, many industries are struggling with increased competition and economic growth has struggled to get off the ground ever since 2008.
With Trump and Brexit unfolding over the next four years, these headwinds could become even stronger leading to an even more hostile business environment. On the other hand, Trump and Brexit could be great for business. You see the problem is, as yet, it's just not possible to tell what the outcome will be.
The bottom line
Overall, uncertainty is the number one obstacle investors will face during the next 10 years. The best way to overcome unpredictable markets is to invest the Warren Buffett way, by taking a long-term perspective, exercising patience, keeping a cool head in volatile markets and looking at stocks as a fractional ownership interest in businesses.
This approach will help you get your steady 4% per annum and returns may even exceed this target if you take advantage of other investors' skittishness. Buying on dips and reinvesting your dividends will accelerate returns.
However, the one thing you want to avoid is timing the market. If there's one market certainty, it's that market timing almost always ends in tears.
Make money, not mistakes
A recent study conducted by financial research firm DALBAR found that the average investor realised an annual return of only 3.7% a year over the past three decades, underperforming the wider market by around 5.3% annually thanks to poor investment decisions.
To help you streamline your investment process, realise and understand the most common investor mis-steps, the Motley Fool has put together this new free report entitled The Worst Mistakes Investors Make.
Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.