How discipline has paid off for share market investors...

Investors worldwide have been rattled by the heightened volatility on share markets over recent weeks.

A combination of factors have largely been to blame, particularly fears around rising interest rates as global inflation levels continue to surge.

Over January the U.S. share market fell more than 5 per cent, its worst performance since the onset of the COVID-19 pandemic in early 2020.

The Australian share market was hit even harder, falling more than 6 per cent over the first month.

But that's just the short-term story. New Vanguard data shows that, over the last decade, share markets have outperformed all other investment sectors.

In fact, from the start of 2012 up until the end of 2021, investors with a broad share market exposure who reinvested all the dividends they received over time back into the share market would have achieved strong returns.

The U.S. share market was undoubtedly the best place to be over the last decade.

With an average return of 20.6 per cent per annum, a $10,000 initial investment on 2 January 2012 would have grown more than six-fold to around $66,000 by 31 December 2021. That's a total return of 552 per cent.

International shares – measured by index funds that invest across thousands of companies around the world – achieved an average annual return of 16.8 per cent.

That performance would have turned a $10,000 investment a decade ago into more than $47,000 by the end of last year, for a total return of more than 370 per cent.

By contrast, the Australian share market hasn't performed as strongly as either the U.S. or international shares.

Its average annual return has been 11 per cent, which would have seen a $10,000 investment at the start of 2012 grow to about $28,000.

Yet that's still almost triple the initial investment sum and represents a total return of about 180 per cent.

Other asset sectors exposed to the share market also haven't done badly for investors who've stayed the course over the last 10 years.

Take the listed property sector. Despite hitting some major speed bumps along the way, including being the best-performing asset class in 2019 and the worst-performing in 2020, it's delivered an average annual return of 13.8 per cent.

So a $10,000 investment into a fund tracking the returns of all the listed property companies on the Australian share market in 2012 would have grown to almost $37,000 by 31 December 2021.

That's not too bad either, representing a total return of 266 per cent.

The big investment takeaway here is that short-term volatility on markets has little if any bearing on long-term investment returns.

In early 2020, over just a few weeks, global share markets tumbled more than 35 per cent.

Yet, by the end of 2020, markets had recovered most of their lost ground. Last year they hit new record highs.

It's only when you take a long-term view of the performance of share markets over time that you get to see the bigger investment picture.

And it shows that while markets do experience volatility and can sometimes fall quite sharply over short periods, they consistently rise over longer time frames.

During times of uncertainty, shares are likely to be much more volatile than fixed income assets such as bonds.

The 10-year return from bond markets has been just 4.2 per cent per annum, however bonds tend to act as a portfolio stabiliser during choppy conditions.

Cash returns, which closely reflect official interest rates, are largely unaffected by what happens on share markets.

Record low interest rates have resulted in the 10-year return from cash being 1.9 per cent. If you'd left $10,000 in a bank term deposit since 2012, you'd now have about $12,000.

After inflation is taken into account, that's effectively a negative real return.

The best way to smooth out intermittent volatility and to achieve more consistent returns is to spread your holdings over a range of different assets.

By following a strategy of reinvesting investment distributions such as dividends, and by making additional contributions over a long period of time, the combination of market growth and compounding returns will likely deliver strong results.

Even a low initial balance will grow substantially over time when combined with compounding investment returns.