The stock market downturn of late 2007 until early 2009 has wreaked havoc on portfolio values. Even though the markets have recovered significantly since that low point in March of 2009, many investors fear another downturn. While historic data is no guarantee of future market performance, viewing recurring data trends can provide significant insight into market action. Let’s see what it tells us.
Past performance is no guarantee of future results. The S&P 500 is an unmanaged index which cannot be invested into directly.We can see that there have been 16 periods of downturn over 83 years. Of those, five have been significant, in the early 30s, late 30s, the early 70s and twice in this most recent decade. The rest of the downturns have ranged from slightly down to about 10% declines.
Now let’s view the recoveries. They have all been of greater magnitude and longer duration than the downturns, even after the big declines. There have been no back-to-back declines, although some have been multi-year downturns. The average rate of return for the S&P 500 for all of the period shown has been 9.8% per year. During that same period of time, bonds have averaged 5.4%[1] per year in total return. And balancing bonds and stocks together in an equal mix would have averaged 8.2% per year. And, very importantly, the volatility of that blended bond/stock portfolio would have been almost identical to that of bonds alone.
Some folks like to talk of a “new paradigm” and that things are “different now.” We feel that war, political turmoil, international instability, commodity price increases and a host of similar ills have been part of the human existence for all of history. So today is really not all that different. I recently heard a presidential address wherein the president referred to nay-sayers who said our best days are behind us here in America. And the president disagreed. He was correct, as that president was Ronald Reagan and the year was 1980.
We believe that placing faith in the long-term productivity of our country and the world community will prove wise. Lots of innovation and human advancement awaits us, we believe, and investing in the stocks and bonds of various productive enterprises enable us to participate and potentially benefit financially. In contrast, by seeking only low rates of return on invested assets in a mistaken attempt to avoid risk, we leave ourselves open to the ravages of taxation and inflation without sufficient return to overcome those detriments.
We believe that investors must employ time-tested, textbook principles of investment management. We utilize those in our investment management work for our clients. After all, there is a reason they found their way into the textbooks. Please feel free to contact any of our financial advisors here at Fragasso to discuss your particular investment needs and questions. Call us at 412-227-3220 or 800-900-4492. Or visit us at www.fragassoadvisors.com.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Investing in stocks and/or bonds entail risks, including possible loss of principal.
Robert Fragasso is the Chairman and Chief Executive Officer at Fragasso Financial Advisors, a Pittsburgh-based investment and financial planning firm. Due to industry regulations, comments are not permitted on this blog. If you would like to contact the author, please email us at blog@fragassoadvisors.com. Robert can also be reached for comment at 412-227-3200.
[1] Government Bond Index