After two fantastic years in the U.S. stock market, it’s due time for me to throw some cold water on you, as I periodically try to do before the investment markets do it for me.
As a reminder, and on average, the U.S. stock market has experienced declines of:
10% every 2 years.
20% every 7 years.
30% every 12 years.
International stock markets exhibit largely the same behavior as well, mainly because of how intertwined the world economy is, and how the human emotions of fear and greed move markets regardless of geography.
Of course, despite those declines, the U.S. stock market has also returned about 10% per year on average, and international markets are not far behind.
That is exactly why putting up with those periodic and occasionally large declines is frequently worth it. Growing your nest egg by an amount like that can often enable you to arrive at and enjoy the retirement or financial independence that you want.
This time of year, the financial headlines are full of stock market projections, and pretty much every year they are grossly wrong. The chart below from Dimensional displays how the S&P 500 performed in 2024, compared to how it was projected to perform by the world's various investment analysts at the start of the year. In short, nobody was even close.
So, as alluring as it is to believe that someone has a crystal ball, their past predictions almost always tell us that they simply don’t, and current forecasts need to be acted on carefully, and with a great degree of moderation.
With that said, sticking our heads in the sand and being oblivious to potential opportunities and risks is not a great approach, either.
There’s a very, very fine line to walk here.
If I had to pay attention to a forecast, it would be Vanguard’s, so let’s take a look at what they are projecting over the coming decade for various investments, from their December 5th Capital Markets Model forecast:
Two things should stick out to you.
One, they believe U.S. growth stocks are going to lag considerably; a substantial reversal from what they've done the past few years.
Two, they believe the best returns are going to come from international stocks.
We are all subject to recency bias, which is simply our natural inclination to give recent events more "weight" in our memory. When it comes to investing, that mean that it is natural and easy to believe that the US stock market is going to continue it's dominance, because that's what we've experienced the past ten or so years.
However, if history is any indication, that may not be the case.
The chart from Hartford below shows the cyclical nature of US (as measured by the S&P 500) versus international (as measured by the MSCI World ex USA Index) stock market performance. There are undoubtedly periods of time where international markets outperformed the US. That baton has changed hands every 8 years on average; and we are currently in a 13.6 year long period of US outperformance.
Another important takeaway from Vanguard's forecast is the timeframe they are presenting. Vanguard generates these forecasts for 10 and 30 year long periods, alluding to their belief that short-term projections are meaningless, and that investors would do well to zoom out and judge their portfolio's performance over decades, and not months.
Also of importance is their very deliberate decision to provide a range of conceivable outcomes right off the bat; their approach is clearly not about predicting next year's returns down to a fraction of a percent. Instead, using this to merely help us set expectations can make it substantially easier to stick with an investment plan over the long-term, which is key to successful investing.
Our key take-aways are:
✗ To avoid making investment decisions based on fear, greed, or the latest, exaggerative, sensationalized forecast.
✓ Acknowledge that today's winners can become tomorrow's losers, and vice-versa, and to prepare your portfolio and retirement plan accordingly.
✓ Remain patient, prudent, and tune out the hype of the financial media.
“Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria.” - John Templeton
If you’d like to discuss this or anything else, please schedule some time together below.
Moore Financial Management, Inc. is an Investment Adviser registered with the State of Florida. Our current disclosure brochure, Form ADV Part 2, is available for your review upon request. Past performance is no guarantee of future results. All investing involves risk, including the loss of principal. This email is for educational purposes only and is not advice. Consult with your tax, legal, and financial advisor before engaging in any transaction.