On March 9, 2019, Wall Street sang happy birthday to our current bull market. That was the tenth anniversary of the day when the S&P 500 closed at 676.53 and the Dow Jones Industrial Average bottomed out at 6,547.05.
Though it hasn’t been without bumps, especially last fall, the markets have since maintained an upward trajectory. Last Friday, March 22, the S&P 500 closed at 2,800.71 and the Dow Jones closed at 25,502.32.
The Upside: Big Gains
Investors are thrilled at the continuation of the bull market, and for good reason. They have made a lot of money. If you invested in the stock market at any time during the past 10 years, you have likely made money as the stock market has gone mostly up over this time period.
The bull market has more than made up for the wealth that was lost in the Great Recession for those who stayed invested. For a lot of my younger clients that have only started investing in the last decade, it has enabled them to build a strong financial foundation that would have taken longer during more turbulent times.
The Downside: Altered Perceptions
While you may think it’s great that your portfolio has only increased in value, there is a downside to having such a long bull market.
When analyzing investments, most people look at the 1-, 3-, 5-, and 10-year returns. Those are the performance numbers that nearly all websites show, whether it’s Morningstar, Vanguard, or another. Now that the bull market has hit the double-digit years, any returns looking at 3-, 5-, or 10-years are now likely showing positive returns- and probably significant positive returns.
Why is that a bad thing? It alters your perception and gives investors a false sense of security. If an investment has only gone up over the last 10 years then it must be a sure thing, right? Not quite. Enjoy it, for sure, but keep your future expectations in check. After all, “past performance is no guarantee of future results.” This little piece of ‘fine print’ is common in the investing world. It rings true, perhaps, now more than ever.
Let’s look at the S&P 500 to see how this looks. The 10-year annualized total return is 16.67%*. Pretty impressive! But if you back it out about another 1 ½ years to the peak of the last bull market, the annualized return is only 7.97%. That’s less than half of the 10-year return. If you only look at the previous year and a half, the return is -38.84%!
You can look at these two graphs to see what a difference the time period that you look at makes on your overall impressions of an investment:
The past 10 years:*
The 1 ½ years before that:*
Just as my toddler behaves like a completely different person between 8-9am and 4-5pm, investment returns vary greatly depending on the time period that you’re looking at.
What You Should Do About It
So, while the bull market has produced great investment returns, it has also skewed the information available for your analysis. Because of this, you need to be wary of the numbers you’re seeing and extra-careful when making investment decisions. And if someone is ever trying to convince you to invest in something based on past returns, be wary of the time period those returns look over.
While you’re celebrating the bull market’s birthday, don’t get comfortable and think that things are always going to be this way. They aren’t. There’s more risk in the stock market than the recent numbers may suggest.
Does that mean that now is the time to lock in your gains by cashing out your investments before the market crashes? I wouldn’t recommend that.
Just because the bull market has reached the double digits doesn’t mean it’s about to crash. Economists have been predicting for years that the bull market was getting too long and would soon turn to a bear. Take a look at the graph and you’ll see how much you would have lost if you had listened to them and converted to cash five years ago.
Short-term movement of the stock market is impossible to predict, so it’s best not to make investment decisions based on your feelings regarding where the market is at a given point. Instead, it’s important to maintain a broadly diversified portfolio that is personalized for your unique risk tolerance, investing time horizon, and financial goals.
If you need help with your investments or want to make sure your portfolio is prepared for whatever happens next with the market, schedule a call with me today!
About Wacek Financial Planning
Founder Ben Wacek is a fee-only Certified Financial Planner™ and Certified Kingdom Advisor® who has a passion to help people of all income levels make wise financial decisions and steward their resources from an eternal perspective using Biblical principles. Based in Minneapolis, MN, he works with clients both locally and virtually throughout the country and abroad. If you’d like to learn more about Wacek Financial Planning, please visit www.wacekfp.com.
*S&P 500 numbers and graphs taken from the Dimensional Fund advisors website.
Photo courtesy of rawpixel.com on pexels.com.