If there’s one phrase that pops up constantly within wealth management literature, it’s “past performance does not guarantee future results,” and experience teaches us that disclaimer isn’t kidding. The future will only barely remember the past and it feels no obligation to follow the past’s example. Just like our kids.
But we still need some basis to make financial and life plans. Simply spinning a mental roulette wheel and picking an expected return or rate of inflation won’t work. Well, it might, but if it does, it’ll be luck. Instead, we look back at last year’s performance, maybe 10 years, maybe even for the past century to get an average historical return and risk. We then might nudge those numbers up or down to reflect our economic or business outlook or maybe as a way to be a bit more conservative.
Also, many people use 10-year average returns. That kind of makes sense, doesn’t it? Ten years is enough time for a sophomore in high school to earn a four-year degree. That should be enough market history to base a decision on, right? Well, not necessarily.
Let’s look at the S&P 500’s average annual total return for the past 10 years and then look at individual calendar year returns.
For the past 10 years ended Oct. 1, the S&P 500’s average annual total return (that includes dividends) was 13.42%. However, only two of the past 10 calendar years were within even 5% of that average return number. The highest calendar year return was in 2019 with 31.49%, and the lowest was an 18.11% loss over 2022. So, what we see here is that we can’t use 10-year averages to plan on how the market will perform for the next year.
OK, can you use the past 10 years to estimate how the market might do for the next 10 years? Well, I looked at 10-year periods from 1944 to 2023 (I used Macrotrends.net). I couldn’t reliably say that if the prior 10 years were below the long-term average, the next 10 years would be better.
Investment returns might appear to be all over the place, but they aren’t random. They are driven by the economy’s opportunities to grow, peoples’ drives and talents, and the resources available to do so. But the takeaway here is that we should use long-term averages cautiously. They can serve as a hint, but not a promise, and we should be especially careful when using long-term averages to forecast the short term. We also need to be open to technological change that can accelerate growth or political change that can derail it.
What we can do, however, is build conservative – but not panicky – expectations into our plans that allow the markets to occasionally underperform while still making progress towards our goals.
Evan R. Guido is the founder of Aksala Wealth Advisors LLC, a 2018 Forbes Next-Gen Advisors List Member, and Financial Professional at Avantax Investment ServicesSM. Evan heads a team of retirement transition strategists for clients who consider themselves the “Millionaire Next Door.” He can be reached at 941-500-5122 or eguido@aksalawealth.com. Read more of his insights at heraldtribune.com/business. Securities offered through Avantax Investment ServicesSM, member FINRA, SIPC. Investment advisory services offered through Avantax Advisory ServicesSM, insurance services offered through an Avantax-affiliated insurance agency. 6260 Lake Osprey Drive, Lakewood Ranch, FL 34240.
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