When will we get back to average market returns?
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Manic |
Worried & Depressed | If the stock market had a personality disorder, the diagnosis would be manic-depressive. It has always been that way and this past quarter was a reminder to expect radical "mood shifts" in stock market performance.
Talking about "average market returns" is like talking about average temperatures. Imagine placing one foot in a bucket of freezing ice water and the other foot in a bucket of boiling water. On average, you are comfortable! After 30+ years of daily monitoring the financial markets, we know that owning stocks can feel anything but "comfortable".
Citing average total returns in the stock and bond market gives the false impression that that these returns should be expected year over year and ignores the inherent volatile nature of the markets. The fact is there have been very few years when the stock or bond market delivered returns that were even close to the average market return. Financial markets, stocks in particular, are inherently volatile over the short term. This should not be a surprise but the financial media likes to portray volatility as something "new". Here are the facts:
From 1926- 2009, the U.S. stock market average total return was 9.9%. However, in only 6 out of 84 years did the annual return fall within two percentage points of the "average" total return of 9.9%.*
From 1926-2009, the U.S. bond market average total return was 5.7%. However, in only 20 out of the 84 years did the annual return fall with two percentage points of the "average total return of 5.7%.*
What does this mean for you? - Expect year over year volatility and temper your near-term performance expectations. It is rare for the markets to deliver returns near their historical averages. In fact, there have been only three times in the last 84 years that stocks and bonds performed in line with their historical averages in the same calendar year (1926, 1968, and 1992).
Understand the risk/return relationship - The higher the return potential of a given asset class, the higher the risk. Do not take anymore risk than necessary but take enough risk to increase the odds of reaching your retirement goal and retaining the purchasing power of your money. Only take risks where you have a high probability of being paid for taking the risk. Diversify the risks that you take.
The cure for manic-depressive stock market behavior is adopting an investment discipline and sticking to it. - Volatility is a certainty. Do not allow the short-term movements of the markets to influence your long-term investment plan. Understand that the higher probability of capturing the "average market return" comes from staying invested over the long run. Plan your cash withdrawals from your savings in advance so that you are not required to sell assets when prices are low. To quote Warren Buffet, "Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it."
*US stock market returns based on the S&P 500 from 1926-1970 and the Dow Jones U.S. Total Stock Market Index from 1971-2009. Past performance is not a a guarantee of future results. U.S. Taxable bond market returns based on intermediate government bonds data from Ibbotson Associates 1926-1976 and Barclays U.S. Aggregate Bond Index for 1977-2009. Sources: Vanguard, Ibbotson Associates, and Barclays Capital |
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