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Stocks Have Been Great – Will It Continue?

by | May 7, 2019 | Investing

I was reminded of something while doing investment research for a client. The last 10 years have been really, really good for the stock market!

If your 401(k) or IRA survived the Great Recession of 2008-2009 you’re pretty happy with the results. But the question is – will the good times last?

Here’s my expert opinion: I don’t know. Nobody knows, and anyone professing to know for sure where the market is heading is guessing, plain and simple.

But we can look at history to help inform us and “ground” our expectations.

Yes, Sally, It Has Been a Great 10 Years

If you’re a DIY investor, you’ve probably come across mutual fund or ETF Fact Sheets. These are handy 1-2 page documents that summarize what the fund does, how it has performed, and what the fees are.

When I was reading these as part of my research, the historical performance numbers were what jumped out at me. I’ll pick on Vanguard’s flagship S&P 500 index mutual fund (VFINX), which has been around since 1976.

Look at those 10-year performance numbers! Over the 10 years through April 2019, the S&P 500 has delivered a 15.32% annualized return.

To put this into perspective, if you had $100,000 invested in the S&P 500 10 years ago, you’d have over $415,000 in your account today. That’s a pretty incredible return on investment!

Putting the Last 10 Years Into Perspective

Yes, the last 10 years have been very good for the stock market, but we have to put things into perspective.

Exactly 10 years ago we were in the depths of the Great Recession. The unemployment rate was surging towards 10%. Big banks had just been bailed out by the US Government. Home foreclosures were surging. And the stock market was getting pummelled.

The stock market closed at its Recession low on March 6, 2009. Since then, the market has surged, as seen in the chart above. Which means, the 10-year performance numbers we see today BEGAN at the absolute bottom of the stock market in 2009.

Economists call this a “base effect.” Meaning, the numbers are exaggerated by the fact that the beginning of the period was so low, as it was in early 2009.

Is the 10-Year Performance of the Stock Market Inflated?

The logical question to ask after seeing why performance over the last 10 years has been so good is, “Is this normal?”

Not quite.

Credit Suisse and the London School of Economics have looked at investment returns going back to the Year 1900.

I’ve circled in red the historic, annualized return of the stock market in the United States since 1900, according to the study’s authors. You can see that stocks (equities) have, on average, returned about +9.4% per year. That’s good, but a lot less than the ~15% returns we’ve seen the last 10 years.

Another way to look at this is to look at today’s 10-year returns vs. history. The chart below shows a 64-year history of “Rolling 10-year Returns” for the S&P 500 price index (i.e. excluding dividends).

The strong performance of the stock market – combined with the “base effect” of the current 10-year period starting at the bottom of the 2009 stock market melt-down – has led to historically-high 10-year returns.

In fact, only 9% of periods over the last 64 years have produced 10-year returns as strong as they are today.

The takeaway from this history lesson is that yes, we’ve just experienced an incredible 10-year run in the stock market.

Which leads to the next question that I know is popping into your mind…”What’s next?”

Here’s What to Expect Going Forward

Predicting the stock market’s next move is big business. There are 3, 24-hour business channels on cable (CNBC, Bloomberg, Fox Business). There are also countless newsletters for sale out there.

And here’s the industry’s dirty little secret that I picked up in my 20 years as an equity analyst: nobody knows nothin’.

Plenty of people have OPINIONS, but nobody has ANSWERS about the stock market’s next move. I don’t. You don’t. And those “experts” on TV don’t.

In fact, I’ll take it a step further and argue that anyone who tells you they KNOW what’s coming next is LYING.

There’s an old trader’s adage by a famed stock trader, Jesse Livermore, “…if there was any easy money lying around, no one would be forcing it into your pocket.”

Warren Buffett isn’t the greatest investor of all-time because he’s the best stock market timer in history. No. His secret to success is making disciplined investments and then sticking with them for a long, long time.

Here’s the point: if you spend your time trying to time the ups and downs of the market, you’re going to make mistakes that cost you a lot of money.

The Right Questions to Be Asking

If “What’s the stock market going to do next?” isn’t the right question to ask, then what is?

Here are some questions to ask yourself:

  • What’s the goal that I’m saving and investing for?
  • What’s the time horizon for this goal? (i.e. in how many years will you need this money?)
  • What’s my tolerance for risk?
  • Is my current investment allocation in-line with my goals and time horizon, or do I need to rebalance my investments?

Let me walk you through a hypothetical example of a 50-year-old couple in 2009:

Goal: Retirement at Age 65
Time Horizon: Long…15 years into the future
Risk Tolerance: Average
Investment Allocation for this Goal: 70% Stocks, 30% Bonds (based on time horizon and risk tolerance)

If that couple invested $100,000 in 2009 and left it completely alone, they’d have around $330,000 today.

Disclosure Note: for the sake of the example I’m assuming they invested 70% of their money in a Vanguard S&P 500 Index fund and 30% into a Vanguard Total Bond Market fund. I’m not recommending these funds – or any funds – just using them as an example. Check my disclosures here.

Flash forward 10 years and this same couple (now 60 years old) walks into a financial advisor’s office to see what to do next. Let’s reassess their situation:

Goal: Retirement at Age 65
Time Horizon: Short/Medium….they want to retire in 5 years
Risk Tolerance: Average
Current Investment Allocation: 87% Stocks, 13% Bonds

What do you think they should do?
Why?

Here would be some of my observations for this couple if they walked into my office…

First, the “long-term” retirement goal is fast approaching, only 5 years away. So the time horizon for their retirement goal has shifted from long-term to medium-term.

Secondly, their current investment allocation is very aggressive for their age and time horizon. Remember, they never touched their investments after 2009. Because the stock market has been so strong over the last 10 years, that original 70% allocation into stocks has grown to an 87% allocation in stocks!

Given their situation and excluding other factors, I’d likely advise them to rebalance their investments to a more conservative investment allocation.

Would I make that recommendation because I think the stock market is too high? No! My conclusion would be based on their goals, time horizon, and risk tolerance. I’d probably add something like, “Hey, we’ve just had an incredible 10-year run in the stock market if you look back historically so we’re updating this at a good time.”

Parting Thoughts

Here are the key messages I want you to take away:

  1. The stock market has had a great run over the last 10 years, but history suggests you can’t count on that repeating for the next 10 years
  2. Trying to time the stock market is a fool’s game. Nobody wins at that game, and if you try you’ll likely cost yourself a lot of money in the long-term
  3. Your investments should always match your goals, time horizons, and risk tolerance.

This is why – and yes, I’m going to plug my own services – it’s critical to work with someone on a continuous basis when it comes to your finances. Regular updates of your goals and investments keep you from getting surprised if things turn south.

That hypothetical 60-year-old couple got lucky over the last 10 years. But what if they didn’t come in for help and we experienced a stock market decline as we had in 2008, where the market dropped -38%?

In that scenario, they’d be 5 years away from retirement with a portfolio that just lost 1/3 of its value. Not good!

Let me be your guide. I’ll help you identify your family’s most important financial goals. We’ll put some numbers around what it would take to save and invest for those goals.

And I’ll be there with you – by your side – year after year making sure your goals are fresh and your investments remain true to your plan.

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