10%

Ten percent has been the average annual return for the S&P 500 since 1926. One dollar invested in 1926 grew to $7,347 by the end of 2017.[1]  Because of the 91-year average most investors expect (demand) a 10% return every year. In fact, when analysts give their stock market return projections for the coming year the answer is usually 10%. It’s a safe prediction because of the history of the index.

Despite the historical average annual return, the index has never closed at 10%. The closest it came to the average was 2004 when it returned 10.9%.

The road to average is paved with euphoria and despair. From 1982 to 1999 the index averaged 18.5% per year. From 2000 to 2012 it returned a paltry .6% per year. The best one-year return, after World War II, was 1954 when it soared 52.6%. The worst year occurred in 2008, plummeting 37%.[2]

During the Great Depression the market fell 85% and because of the Oil Embargo of the ‘70s it dropped 41%.  It declined 43% throughout the Tech Wreck and 37% amid the Great Recession.

To date, the S&P 500 is up 4.64%. It started the year at 2,695 and by the end of January it had already risen 6.5%. The gains didn’t last long as the market rolled over in February, falling 10% from its all-time high.  From the low of 2,581 it has rallied back to its current level of 2,820.

Most investors don’t allocate 100% of their assets to a single fund or index. A diversified portfolio is the norm but some question whether it’s better to concentrate or diversify. To create wealth, concentrate your holdings and to preserve it, diversify.

Concentration in technology stocks is working well in 2018. A portfolio of FANGs – Facebook, Amazon, Apple, Netflix and Google (now Alphabet) is up 35%. A diversified portfolio of large, small, and international mutual funds mixed in with some bonds is up a measly .81%.[3]

I know these results all too well as my daughter’s account is soaring due to a few of the FANGs, one of which she’s owned for more than 17 years. My account, on the other hand, is well diversified and it’s flat for the year.

As we venture into the second half of the trading year focus more on your long-term goals and less on stock market averages. The market has delivered exceptional returns for decades and the future will be similar. Of course, some years it will rise and others it will fall. As it rises don’t get overly excited or too depressed when it falls. In the long run, a well-diversified portfolio will deliver you market returns and if you capture them you’ll do better than most investors.

I’m optimistic on the future of the market – stay invested my friends!

It's a wonderful thing to be optimistic. It keeps you healthy and it keeps you resilient. ~ Daniel Kahneman

July 25, 2018

Bill Parrott is the President and CEO of Parrott Wealth Management firm located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

[1] Dimensional Fund Advisors 2018 Matrix Book

[2] Ibid

[3] Morningstar Office Hypothetical Tool. The diversified portfolio consists of VOO, VB, VXUS and BND.