I’m going to provide you with some basic data (no opinions, just facts), and then I’m going to ask you a couple questions.
The Data: Most of us have heard that the stock market has averaged about 10% returns per year for the last 100 years or so. That data point is very close to accurate, although 100 years is high, as the analytical pundits don’t really feel great about the data prior to 1926 (the computers weren’t quite as robust in 1925…). What we can say with certainty is that from 1926 – 2017 (91 years), the stock market – as defined by the S&P 500 – has returned almost exactly 10% per year.
Now, of course, some years are more and some years are less, but – on average – the S&P 500 has returned 10% per year over the last 91 years. Got it?
The question is: Of the last 91 years, how many times do you think the stock market actually returned “the average” of 10%?
Now, of course that’s not fair, right? It’s very hard to return an exact number. Fair point, I withdraw the question.
Instead, I’ll give a 20% range, say from 8% – 10%. So, the first question is: How many years of that 91 year period (1926-2017) has the S&P 500 had a Year-End Return of between 8-10%?
Take your time to think about it, but don’t cheat! Write it down on a piece of paper.
Next question: over these same 91 years, how many times do you think the stock market returned greater than 20% (like in 1997 when it returned 38%) or returned less than negative 20% (like in 1931 when in returned -61.1%!)?
Take some time to think about it. Write both these answers down on a sheet of paper (or the sheet of paper in your head), and if you would be so kind as to send them to me, I’d be most grateful.
Drum roll… the answer to the first question is ZERO. That’s right, the S&P 500 has NEVER returned between 8%-10%. I know, it’s completely ridiculous. I had to fact check this at multiple locations. It came real close in 1993 when it returned 10.1%, and oddly enough the next closest was the year earlier, 1992, when it returned 7.6%. Almost every year, the “experts” predict the market will go up between 8%-10% because a) market predictors are clueless and b) they think it’s a safe guess. In reality, they’re predicting something that has never happened (again, proving what we know: they’re clueless).
The answer to the second question is… wait for it… hold… HOLD… HOOLLLDDD (sorry, Braveheart reference)… 41 TIMES! Wait, what?!? 41 times?!? Yes, 41 times in the last 91 years the S&P 500 has returned either greater than 20% or worse than negative 20%. Absolutely nutty.
Setting monthly goals for certain things can make a whole lot of sense. Many bills come in monthly, so monthly budgeting is a wise endeavor. Setting annual goals for certain things also can make sense. How much you have saved relative to your income is a wonderful annual goal to track. Did you take as many vacation days as you wanted? Another great annual goal to track. All that said, the “goal” of annual portfolio performance is not one of those goals that makes a whole lot of sense. And, feeling successful or unsuccessful (or happy or sad) based on monthly or quarterly performance makes absolutely no logical sense whatsoever. Logic is an interesting thing though. My years of experience with clients/friends/family and even colleagues continues to show me that logic fades as unexpected outcomes happen. Put another way, the bigger the surprise, the more logical decisions flow to emotional decisions.
The moral of the story: Stop looking at annual performance as some sort of goal or some sort of success (or failure) or some sort of controllable outcome because it is none of those – it is essentially random in the short term (and, yes, one year is short term). Further, the idea of trying to garner some sort of status of your financial well-being from quarterly performance is laughable. Try to start thinking in decades when it comes to investment performance. Or, stop thinking about performance at all. Instead, focus on the things you can control, for example living in alignment with what’s important to you.
If we’re working together – and if you’re reading this, there’s a decent chance that we are – trust that you have an excellent plan in place to accomplish those things most important to you. But, also know that a plan is not a static painting but an ever changing landscape. And, as winds change in your favor (inheritance, promotion, marriage, etc) or they change against you (disability, job loss, divorce, etc), a good financial planner helps you adjust your course with the altered destination in sight. And, again, none of this important stuff has to do with the schizophrenia of Mr. Market.
Thanks for reading,