Happy New Year (And New Decade)!
“Twenty years from now you will be more disappointed by the things that you didn’t do than by the ones you did.” –Mark Twain
You probably would have gotten a few chuckles at the cocktail party in 2010 if you enthusiastically announced your optimism about the stock market. If you remember that time, we were dealing with a disappointingly sluggish economic recovery and were licking our wounds from the damage endured by the 2008/2009 Global Financial Crisis. Yes, things were on the mend, but the fear was still palpable when reading the headlines about things such as how the Europeans were facing a Debt Crisis, or about how Greece was on the brink of disaster, or how the Fed was considering new methods to keep the US economy on financial life support. It didn’t seem like we could stand on our own two feet anytime soon.
The next year was not much better. If you recall, in 2011 the US barely missed defaulting on its debt as Congress voted to raise the debt ceiling, which then caused the country to lose its top-tier AAA credit rating. The market quickly corrected as the herd mentality was to keep a cautious view on the stock market.
So, at the time, wouldn’t you have been surprised to hear how the next 10 years turned out? Granted, the US economy managed to bounce back and the market found many things to like (Quantitative Easing and Tax Reform, as notable examples). Despite the rough start, the S&P 500 increased at a 13.6% annualized rate over the past decade – that’s a factor of 3.6x on each dollar invested. Put differently, if you had invested $1 million at the beginning of the decade, you would have $3.6 million now. While we wouldn’t have likely recommended putting 100% of your wealth in the stock market, making sure you stayed sufficiently in the game would have had a meaningful impact.
Bonds, on the other hand, did about what you’d expect. That’s the thing about bonds – they’re much more predictable than stocks. In a similar illustration, $1 million invested in an index of intermediate government and corporate bonds (as maintained by Bloomberg/Barclays) would have grown to $1.35 million by the end of the decade, assuming interest income was reinvested. Perhaps not as exciting as the stock market, but it certainly did its job of smoothing out the anxiety-driven bumps when paired with stocks (of which there were several), while producing necessary cash flow streams for those needing income to support a lifestyle.
Do we think the next decade will look anything like the last? Almost certainly not. But perhaps it won’t be as far off as the negative-Nancie's on the financial news are portraying.
We believe that trends have a tendency to revert back to the long-term average. In the case of stocks, that average is in the 9-10% range. Given that the trend was above average over the last decade at nearly 14% per year (but also noting that the starting point was quite low), there are decent odds that the next decade could be below the 9%-10% range, but hopefully not by much (say, returns in the 6-8% range instead).
We should also mention that it’s easier for people in our profession to look “smart” by talking about what could be the next thing that topples the market. For some reason, we’ve all become storm-chasers since the Global Financial Crisis. It’s almost laughable that we (as an investor society) think we’ll spot the “next one” – in our minds, we’re all the wiser now that we learned our lessons from the last debacle. The truth is, the next crisis won’t likely be caused by the same problem (i.e. the Mortgage Crisis in 2008 or the Dot-Com Bubble in 1999). It will likely come from something we are not watching or thinking about (although in hindsight, it will seem obvious). That’s what makes it a crisis. But even if there is another recession, geopolitical crisis, bear market or (fill in your fear); history tells us the market will bounce back, and usually quicker than we think (a reminder why it’s better not to try to time the market and risk missing most of the snap-back). Just reference the first portion of this entire discussion about how longer-term market cycles have a tendency to play out.
Now, there are no certainties in markets (or life for that matter). At the end of the day, we are still playing the odds and making sound judgements. There is a greater-than-remote probability that the next decade will be worse than what we are predicting above. But the above is just our “most likely” scenario, and again, why it’s important to have a long-term investment strategy that considers your ability to take risk along with your time-horizon for each financial goal. We may sound like a broken record talking about this, but it’s true.
Our parting wisdom on the topic of investing for the next decade is that the focus should not necessarily be on what the broad market does in the next 10 years, but that your portfolio of assets represent investments that you are comfortable owning throughout that period – knowing full well that it’s not a straight line getting to the good returns that we typically see over the longer-cycle. Warren Buffet once said: “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years,” with the context being that the stock market can be irrational in the short-run, but if the companies you own successfully create value for shareholders over that time period, the market will ultimately reward the investors. This, again, is why we believe in being owners of individual, high-quality stocks and bonds that we have curated for client portfolios.
As a fruitful decade has come to a close, we are reminded how fortunate we are to have such wonderful clients and to have earned the trust of each of you. We look courageously toward another decade ahead and are prepared to help build each of you a customized investment strategy to fulfill your dreams for years to come.
Please feel free to send us a message or give us a call anytime. Thank you for your continued trust and confidence, and may you have a joyful and prosperous year!
Norris, Perné & French