By: Brian A. Magnan CFP®, AIF®Director – Magnan Family Wealth ManagementUsing History as Our Guide to Compose Your Investment Policy
• The average yearly rate of return of US Large Companies over the last 100 years has been about 10%. For planning purposes, we will assume this trendline return will continue over the long-term.
• Going back just a little more than half a century—1973 through 2024; you'll see why in a moment—we find that just the price of S&P 500 has increased in excess of 50 times in a little over 50 years.
• The cash dividend of the Index increased over 23 times during this period, while CPI inflation went up almost seven and a half times. So, the retirement investor stayed very far ahead of inflation on dividends alone, even setting aside the 50x price appreciation.
• There was a very significant emotional (as opposed to financial) price to be paid for those returns, and I very firmly believe that will continue to be the case. Indeed, we have no reason to ever expect the rewards of equity investing without accepting their very real challenges.
• Thus, if we're going to assume average returns, we must assume the average declines. We start by expecting an average intra-year decline from a peak to a trough of about 15%.
• By the same logic, we must also expect a decline averaging twice that—why don't we call it a third—about every five years on average. Which means, of course, that some declines have exceeded a third.
• Indeed, between the beginning of 1973 and the end of 2024 the S&P 500 effectively halved on three separate occasions.
• But in all that time the longest it's taken an investor in the S&P 500 to break even (with dividends) was five years and eight months. This suggests that the temporary declines, though sometimes quite deep, are relatively short lived.
• The temporary declines have been completely overwhelmed by the permanent advance of both values and dividends. And since the economy can't be consistently forecast nor the market consistently timed, the only way we can ever be sure of capturing the entirety of equities' premium return is by riding out those declines.
• I would only add the stark but very accurate fact that $10,000 invested in the S&P 500 just as the first of those three roughly 50% declines kicked off in January 1973 and left to compound grew to more than $2 million late in 2024.
Our favorite author, Nick Murray once stated “Surprise is the mother of Panic”. We believe our All-Weather Planning Process can assist in minimizing surprise and possibly eliminating panic. January is a popular time for predictions on the future. We base your investment policy using the experiences of our market’s history to determine the range of possibilities in the future. Most importantly, when markets decline and folks start getting concerned, we can authoritatively say, “We planned for this.”
Sources:
- Capital Group Intrayear declines chart 1954-2023
- Wells Fargo Hypothetical Report (IA SBBI US Large Stock TR USD Performance 1926-2024)
- Wells Fargo Hypothetical Report (S&P 500 PR USD Performance 1973-2024)
- Shiller Data (Stock Market Data Used in "Irrational Exuberance" Princeton University Press, 2000, 2005, 2015, updated)
Past performance is not a guarantee of future results.
Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy.