Fowler says equities could lose up to 40%

Equity investors must get used to the fact there is a 40% chance of them losing money in any one year, according to Axa Investment Managers.

The group's head of UK equities Stuart Fowler said this percentage figure assumes returns of 7% per year moving forward and 25% per year volatility.

He said: 'The long bull market in the last 25 years of the 20th Century led many people to ascribe attributes to equities that are no longer relevant.'

In that period, there were only two down years for markets. The 1990s saw an annualised return of 15.1%, compared with 18.8% for the 1980s and 14.2% for the 1970s.

Fowler said: 'The culture has been one of people taking on more risk. The bull market meant people started to see equities as a one way bet.'

Market volatility could continue to swamp annual returns, according to Axa, which sees FTSE stocks moving between 10% and 15% in a day. Its research suggests the monthly standard deviation of the FTSE 350 has doubled since April 1986.

'The difference between buying at 8am or 4pm is now the difference between a good or bad investment,' said Fowler.

'If volatility continues it challenges old habits. Buy and hold strategies won't maximise returns, market timing may be required and equity investment will feel dangerous in the short-term.

'Opportunities for hedge funds will persist, which will mean more volatility, but this does not undermine the long-term case for equity investment. It should be better than bonds and cash.'

Fowler does not predict much further downside in equities, although he believes the situation in Iraq could add more volatility to markets. Assuming market conditions do not change, Fowler feels investors will have to undergo a change of mindset if they are to prosper.

'They need to ensure adequate diversification across asset classes and that means more than just buying overseas equities,' said Fowler.

'Maybe now is the time to look at equities as an attractive form of income that might grow. You need to buy on high yields when shares are down and sell them when they go up. Don't plan for the re-emergence of double digit returns.'

Despite this assessment Fowler sees reasons for optimism, not least because the bear market has left a large number of UK shares on what he sees as 'attractive yields with a reasonable prospect of dividend growth.'

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