Playing the Averages

David L. Johanson |

If I flip a coin, there is a 50-50 chance I will get heads.  If I walk into a casino and put my money on the table, the odds are stacked against me.  If I purchase a broad-based, diversified stock market index at the beginning of the year, historically, the odds would have been in my favor.

Before I go on, we rarely recommend all-stock portfolios.  There is too much risk for shorter-term volatility.  If we look back at the data over the last 60 years, stocks have been an excellent vehicle for individual investors to create wealth.  For others, income may be the primary consideration, not capital appreciation.  Our recommendations are customized to your specific goals and preferences.

Using data provided by New York University School of Business, the S&P 500 Index has risen 47 years and has fallen 13 years (total return, dividends reinvested 1960-2019).  That is an impressive performance that covers rising and falling inflation and interest rates, wars, peacetime, and several expansions and recessions.

Returns have varied by a wide margin.

When the S&P 500 Index finished the year lower, the average annual decline has been 12.7%.  The range of the annual decline: -3.1% to -36.6%.  Yes, there are times (like this year) when the bulls are beaten up.

When the S&P 500 Index finished higher, the average annual increase has been an impressive 18%.  The range of the annual increase: +0.3% to +37.2%.

Stocks have had a long-term upward bias.  It is a theme I have often witnessed, and the historical data reflects this.  I view a well-diversified portfolio as the economic equivalent of purchasing a stake in the U.S. economy.  We do not know if the economy will be larger next year, but over a long period, the U.S. economy has expanded.  We see it reflected in long-term stock market performance.

What About 2020

Today, the outlook has soured due to the health and economic crisis, but we have seen the U.S. economy recover and climb to new highs before.

Stocks can be unpredictable over a shorter period.  While this is sometimes unpleasant, sell-offs are normal.  We take precautions to try and minimize volatility and, more importantly, keep you on track toward your financial goals.

As we begin this new decade, I am reminded of a remark by Warren Buffett, “For 240 years it’s been a terrible mistake to bet against America, and now is no time to start.  America’s golden goose of commerce and innovation will continue to lay more and larger eggs.”