Colin equates success with helping others make good decisions. A DC-area native, Colin works closely with our client families to navigate the complexity of today's financial world.
The calm markets of 2017 may have lulled investors into thinking that stock returns are a smooth ride, but make no mistake, portfolio growth doesn’t occur in a straight line.
Investors and clients constantly wonder: what sort of returns can they expect? Over the next year? Three years? Ten years?
While forecasting short-term performance with any degree of precision is difficult and often unproductive (even for the most experienced investors), it’s important that investors know what sort of outcomes are reasonable. And I doubt this year’s or next year’s portfolio returns will be average for one simple reason: stock market returns rarely are.
Depending on the time frame, stock market returns in the US have averaged out to a compound rate of approximately 8-10% per year. However, it’s rare for any one year to fall in the 8-10% range.
Care to guess how often in the past 90 years that the S&P 500 returns were between 8-10% (the Long-Term average) in any calendar year? Once. In 1993.
The rest of the returns vary broadly:
S&P 500 Total Returns for 1928-2017
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Source: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html
Given the variability from year to year, investors often find themselves building cash positions while waiting for the right time to get into the market, or investors with a sudden windfall find themselves with cash and are hesitant to invest it all at once. This can either be because they don’t trust their current advisor or they aren’t sure how to invest it themselves.
As we know, market returns aren’t linear; they aren’t the same year after year. It can take years for a diversified portfolio to produce an “average” return, and waiting for the right moment, or for a new advisor to deliver the promised rate of returns before investing more cash, can cause an investor to miss out on gains in the interim. A better approach is to dollar-cost average into the market systematically, which takes the guesswork out of timing decisions.
2017’s calm markets may have lulled investors into thinking that stock returns are a smooth ride, but make no mistake—portfolio growth doesn’t occur in a straight line. Nobody knows for certain what the market will deliver this year or next, but my guess is it will be anything but average.
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