market returns - how you measure matters

In a recent conversation with a potential client, he was telling me about his investment experience. He mentioned how he has heard how great the last 10 years in the market have been, but he doesn’t feel that his portfolio has grown nearly that much. I believe there could be several reasons for this, and part of it could have to do with the way investment returns are realized and measured.

 

It’s now been 10 years since we hit a market-bottom during the Great Recession in March 2009. Given that, if you look back on 10-year returns for many investments, they look great, but does that tell the whole story?

 

Let’s look at returns for the S&P 500, which has been the best performing major index over the last decade.

 

Period                                                   Annualized Return           Notes

 

10 Years

5/10/2009 – 5/9/2019                                    14.3%                    Recent 10-year period starting                                                                                                              in May 2009

 

12 Years

5/10/2007 – 5/9/2019                                    7.75%                    Going back just 2 additional                                                                                                                 years reduced returns by                                                                                                                       almost half                                   

20 Years

5/10/1999 – 5/9/2019                                    5.87%                    The last 20 years include the                                                                                                      tech bubble burst early in

                                                                   the 2000s

 

The most recent 10-year numbers may feel misleading for several reasons. First, you only really feel like those were your returns if you happened to get in near the bottom. If you were fully invested in the S&P 500 prior to the 2008 recession, it took you until 2012, or over 4 years just to get back to break even. Second, this index is 100% in US stocks, which is likely not an appropriate portfolio for most investors nor how most people are invested (and if they were, the “lost decade” of 2000-2010 was not a fun experience for them), especially as they approach or are in retirement.

 

One additional note, it is often said that long term returns of the stock market are 10-12%. But here again, the timing can make this number vary widely. Crestmont Research looked at different 20-year return periods of the S&P 500 and found that returns over twenty-year periods ranged from 3.1% to 17.1%. Therefore, be cautious when using averages and assumptions when planning, and have a strategy for when they deviate.

 

Takeaways:

 

- Market returns can vary widely over various time periods

 

- You can’t control when a market is going to zig or zag, but the timing can have a significant impact on your plans

 

- Have a purposeful investment strategy matched with how you plan to use your investments to deal with the ups, downs and uncertainty of the market

 

- If you are needing to take withdrawals from your accounts, be sure you understand the concept of “sequence of returns (market timing) risk” and have an income strategy that takes the ups and downs of the market into account, to give yourself the best chance of not depleting your portfolio

 

- Broad diversification can help smooth out returns

 

 

Diversification seeks to reduce the volatility of a portfolio by investing in a variety of asset classes. Neither asset allocation nor diversification guarantee against market loss or greater or more consistent returns. An investor cannot invest directly in an index.

 

 

 

Advisory services offered through Arbor Point Advisors. Securities offered through Securities America Inc., Member FINRA/SIPC. Arbor Point and Securities America are separate companies. CA Insurance #0E88557

how to measure returns
Retirement Planner in San Diego

 

Advisory services offered through Arbor Point Advisors. Securities offered through Securities America, Inc., Member FINRA/SIPC. Arbor Point Advisors and Securities America are separate companies. This site is published for residents of the United States and is for informational purposes only and does not constitute an offer to sell or solicitation of an offer to buy any security or product that may be referenced herein. Persons mentioned on this website may only offer services and transact business and/or respond to inquiries in states or jurisdictions in which they have been properly registered or are exempt from registration. Not all products and services referenced on this site are available in every state, jurisdiction or from every person listed. CA Insurance #0E88557

Advisory services offered through Arbor Point Advisors. Securities offered through Securities America, Inc., Member FINRA/SIPC. Arbor Point Advisors and Securities America are separate companies. This site is published for residents of the United States and is for informational purposes only and does not constitute an offer to sell or solicitation of an offer to buy any security or product that may be referenced herein. Persons mentioned on this website may only offer services and transact business and/or respond to inquiries in states or jurisdictions in which they have been properly registered or are exempt from registration. Not all products and services referenced on this site are available in every state, jurisdiction or from every person listed. CA Insurance #0E88557​

Rancho Bernardo Financial Planner