If you are investing in the sharemarket, or any asset class for that matter, the main purpose is to safeguard your capital and achieve a decent return on that capital over a period of time.

Historical data suggests that the best returns are achieved in the sharemarket – and over long periods a compound annual return of around 10% on average is the benchmark.

The largest listed investment company on the ASX, Australian Foundation Investment Co.Ltd. (ASX: AFI) has delivered compound annual returns over the past 10 years of 5.5%, compared to the S&P/ASX 200 Accumulation index (which factors in dividends) of 4.5% to the end of April 2016.

Over the past 20 years, the sharemarket has delivered annual returns of 8.7% before tax, while residential investment property is even higher at 10.5% also before tax.

If you are investing in the sharemarket directly, then that’s an implicit statement that you are aiming to beat the professional fund managers and the market. That might be easier than you think when plenty of research has shown that most fund managers can’t even beat the index (including here and here).

However, investors should not think that they can generate returns of 20% or more consistently each year. That’s extremely difficult to do, and history has shown that very few investors have managed to do that for long periods – with Warren Buffett the most well-known example.

Interestingly, 3 ASX-listed investment companies have managed to produce annual returns of above 10% over the 10 years to end of 2015 including Carlton Investments Limited (ASX: CIN) – 11.3%, WAM Capital Limited (ASX: WAM) – 10.3% and Australian Leaders Fund (ASX: ALF) – 10.3%, according to broker Bell Potter.

Given investors would have only achieved returns of 4.5% investing in the S&P/ASX 200 and reinvesting dividends over the past 10 years, the performance of the LIC fund managers is outstanding. It also indicates that to beat the market over the past 10 years means making sure your portfolio was substantially more diversified than the index – which has been top heavy with financial companies and the two large miners.

The big four banks still dominate the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO), making up 27% of the index, and 35% when you include the two large miners and Macquarie Group Ltd (ASX: MQG).

To beat the index then, investors need to look outside the top 10 shares – which represent 47% of the index.

Foolish takeaway

The data suggests investors should aim for an annualised return of between 10% and 20% – as long as your portfolio is widely diversified beyond the ASX’s top 20 shares. Aiming for anything less than that and you should buy shares in several LICs (or Exchange Traded Funds -ETFs – that track the indices) and find a hobby.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.