The S&P 500’s past 5 years have not been as great as some think
Ask most casual observers
about the stock market, and you will probably hear two types of responses. Some will say it has been a great run the past many years, and their S&P 500 index fund has been a rock star in their portfolio. But, when you speak to others, you may get a bit of what we call FOMO, the fear of missing out. They acknowledge that the market has done well. But they are more concerned with making up for what they feel they missed out on.I truly hope that I can help those with FOMO feel better about their investment experience over the past several years. I also hope that what you will see below will help you understand that
reviewing your own investment performanceis not about chasing returns. It is about viewing your own results in the context of what has actually happened.
A donut with 2 holes?
Here is a chart of the S&P 500 ETF (SPY) from the start of 2015 through last Friday, August 2, 2019. In other words, the past 4 years and 7 months. The total return over those 55 months: just over 55%. That’s right at 1% per month. Nice!
However, that is the proverbial donut. Below, I present the round, tasty part of the donut. From February 12, 2016 through January 26, 2018, the S&P’s return was about 53%. That is nearly 24% a year, compounded. That’s really great.
So, in that very fine 24 month stretch, the S&P 500 delivered nearly all of its gains from the start of 2015 through last Friday, August 2, 2019. During the other 31 months, your return in an S&P 500 Index fund: zippo.
So, what’s wrong with that?
I think a lot of the FOMO comes because the S&P has had a pair of flat periods around a nice 2-year run. By the start of 2018, the chorus of disappointed investors likely grew louder. After all, 2016 and 2017 were back to back excellent years. But the returns before and since that excellent run.And, the stock bull market that began way back in 2009 had reached immortal status with the media, and with anyone on Wall Street who believes their
value to clientsis threatened by less-than-sunny market conditions. Naturally, they’d want to keep pumping up the hype machine, right?
The heart of the great bull market
Here is what I consider to be the heart of the bull market. It is the period from the Financial Crisis low in March, 2009, through the end of 2014. Here it is.
That was a period of nearly uninterrupted gains for investors. Of course, many were still shell-shocked from the Crisis and recession. Thus, they were likely under-invested during this phase. This is really where the FOMO should come from. If you are still fearing what just happened, you likely miss out on the meat of the next bull market.This is one reason why I have been a hedged investor for over 20 years. If you are willing to miss some of the excitement on the way up, and focus more on your ultimate objectives for
your stock market investments, you will be more even-keeled when the cycles get rougher.
The bottom line on FOMO
We are naturally drawn to good news when it comes to our money. As investors, we also react much more negatively to bad results than good ones. At least, that’s what many studies have shown over the years.Markets tend to fall much faster than they rise. But we also tend to forget those falls pretty quickly. The latest example, which I have written about here, is that last December, the S&P 500 fell over 15% in 3 weeks. But that drop was erased in the early part of this year. So, many investors treat it as no harm, no foul. Let the bull market continue.But I think there is a pervasive issue among investors. We tend to have selective memories. Part of that is developing a feeling that we should have done better. But this assumes that reaching your objectives requires you to ride each up cycle very hard. Realistically, few investors need to subject themselves to that kind of risk.Most importantly, investing by looking in the rear-view mirror is a risky game. This is especially true at the end stages of bull markets. Keep your FOMO where it belongs — out of your investment plan. Let facts, not fears, drive you toward a successful retirement.Related:
NOW It’s A Bear Market
