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.

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