Monthly Archives: November 2014

Believing in the Process

The returns we saw from 1982 through 1999 when the S&P 500 generated an annualized rate of return in excess of 17% were a once-in-a-lifetime opportunity. During this incredible period, it was hard to believe that returns like this weren’t the new norm.

SP500-historical-returnsLooking back, it’s easy to see that this couldn’t continue. Long-term common stock returns dating back to the 1920s have been roughly 10%. What this ultimately means is that when you have a period of over performance, there has to be a period of underperformance to get returns back in line with historical levels. This doesn’t mean that stocks aren’t the best path toward financial prosperity. It simply means that we can’t count on oversized returns to bail us out from years of under saving and overspending.

On the plus side, if you look at historical returns of the S&P 500 from 1926 through 2013, the market has been up 63 of the 88 years during this time frame. That’s roughly 72% of the time or three out of every four years. Over the past 87 years, we’ve only had four periods where the market has had two or more consecutive down years (1929–1932, 1939–1941, 1973–1974, and 2000–2002). Now I know losing money isn’t fun, but remember, you are in this for the long haul. If you’re in your mid-30s, you’ll be investing in stocks for 50-plus years, which gives you a long time horizon to deal with the ups and downs of the market. Just remember, most of the time the market is up, which is why you always want to be invested in stocks and/or index funds that give you the best exposure to the overall market.

I know it’s hard to hear people brag about an investment where they made more in one year than the S&P 500 has made in the last ten, but don’t succumb to temptation by chasing after something that can go away as quickly as it came. Think of the story about the tortoise and the hare. The reason the tortoise wins the race is he understands that life is a marathon. In the end, you need to stick with your game plan and believe in the long-term process of investing, not the short-term results.

Finally, it’s important to remember the good times won’t last forever. Don’t let short-term prosperity in the stock market or your personal life change your spending habits to the point that your need for immediate gratification jeopardizes your financial future. If you save your money and spend wisely, you don’t have to be a hero trying to invest in the next big moneymaker.