Twenty-Five Years of Outstanding Returns

Take a look ahead to page three to see how asset allocations impact risk and return an investor can expect from their portfolio. This has been a great time to be an investor as the average return for the past twenty-five years on equities has been 10.08%. Of course, very few portfolios are allocated 100% into stocks. Moreover, if you were 100% in stock and missed the best one week period out of those twenty-five years (the exact week ending November 28, 2008) your portfolio starting with a $1000 investment went from a final total of $8360 down to $6977. And if you missed the best six months, which were from March to September in 2009, your total went from $8360 to $5425 (performance numbers based on the Russell 3000 Index as presented by Dimensional Fund Advisors). So not only is it tough to keep 100% of your portfolio invested in stock, it is also tough to keep it there through all the volatility as nobody enjoys a 38%+ equity market decline as has happened. ‘Staying the course’ when that does happen is easier said than done.

But this is the happy side of the investment story. Markets are sitting very near all-time highs presently, which may produce less than stellar equity returns for the next twenty-five years. Now it may come to pass that the next decades will produce even greater returns, which would be historic. The baby beamers have been blessed with the way the economy and the markets have progressed since the bust of early 2000 (not to mention the twenty-years before). Now we will see what Gen Z reaps from the markets as returns ultimately are based on when one is born. It is a very different set-up now, however, as compared with the 80’s and 90’s as interest rates are higher and debt is exploding throughout every sector of the economy. The sun still shines for equity investors as earnings so far have kept pace with rising equity prices. While the market is rotating away from the Magnificent Seven and all things chips, whether this rotation will outrun a recession in earnings remains to be seen. The new Warsh led Federal Reserve will have a say on market returns as well should he decide to raise rates. The issues start once the ever-increasing earnings estimates outpace the actual earnings reported, which is an unfortunate but inevitable development in a euphoric market. Then it will be time to remember the behavior of dogs when a tsunami approaches…be prepared to head for high ground.