Today we’ll be looking at what is arguably the most discussed part of your investment portfolio, US stocks. If you missed the last two installments of our Investing for Retirement series be sure to check them out. They were on bonds and international stocks. Turn on CNBC (no financial planner has never said this phrase before, probably), and you’ll be updated every minute of the day as to how this asset class is performing in bright, bold numbers. If you get online, watch TV, or listen to the radio throughout the day, it’s almost impossible to not hear what US stocks are doing day-to-day. We’re constantly bombarded with information, opinions, and data. Is any of it actionable, or do we need to “tune out the noise?” Let’s start by taking a deep breath and going over what we know has happened to US stocks.
US Stocks and Long-Term Returns
Since 1995, the S&P 500 (including dividends) has an average annualized return of 9.87%. Over the same timeframe, the MSCI All Country World Index, excluding the US has an average annualized return of 5.5%. Over the last ten years, the US market has outperformed the rest of the world by nearly 8% per year. Ten years ago, whatever money you put in foreign stocks would have almost doubled by now. The money you put in US stocks would have nearly doubled twice.
Holding Period
Going back to 1950, the longer you held US stocks, the greater the likelihood was that you experienced positive returns. We’ll use the S&P 500 Index as a proxy for US stocks. Since 1950, if you held this basket of US stocks for 1 day, the odds of a positive outcome were basically a coin flip (53%). Hold on to those stocks for 1 year, and you saw positive returns 74% of the time. Over 10 years, your returns were positive 92% of the time.
No Pain, No Gain
Sounds easy, right? Buy a fund that tracks the overall US stock market, hold that fund for several years, and make money. There’s an adage about free lunches that comes to mind. In order to reap the rewards of positive market returns, you have to pay the price of admission, one of which is volatility and drawdowns.
Source: ycharts.com
If you own nothing but US stocks, you will frequently see your portfolio value declining from its previous highs. Over the last 70 years, 10% corrections were nearly annual occurrences. Bear markets (20% declines) happened (on average) once a decade. You would have seen your portfolio cut in half three times.
(Nearly) ALL-TIME HIGHS
As of the writing of this post, the S&P 500 is within earshot of its all-time high, off by just a couple percentage points. For whatever reason, the phrase “stocks at all-time highs” has become some kind of a warning signal that a crash is imminent. Looking back over the past 70 years, that couldn’t be further from reality. Since 1950, we’ve seen 1,251 new all-time highs in the S&P 500. Since 2010, we’ve had 211 all-time highs.
In a perfect world, you could be fully liquid and time the market, getting “all in” when stocks have crashed, but we don’t live in a perfect world. If you’re sitting holding too much cash right now, but hesitant to invest that cash because of where the stock market is today, remember this: all-time highs have always (eventually) led to new all-time highs. While it might not be optimal to buy in at or near all-time highs, historically you’ve still made money investing in (and holding onto) US stocks at their previous all-time highs.
There’s a saying regarding investments that diversification is the only free lunch. Next week, we’ll wrap up the Investing for Retirement series and explore things like sequence of return risk (a potentially huge problem for those of you planning for retirement) how to know if your portfolio is truly diversified.
Portfolio diversification can be a tricky thing, and we’re here to help. Our financial planners will review your portfolio, stress-test it, and report back to you potential risks and opportunities. If you’re interested in this process, feel free to give our office a call any time at 913-393-1000 or schedule a complimentary consultation below.
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The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.