Let’s play a quick game. Here are the 10-year cumulative returns of some investments I chose.
In other words, this is the return across the full 10 years, not the per-year (annualized) return.Investment 1: -7.5%Investment 2: +159.0%Investment 3: +342.6%Investment 4: -26.5%Investment 5: +177.5%There they are. Now, which one would you choose to invest in, or would you allocate among more than one of them? And, what determined your decision?OK, I won’t keep you in suspense. These investments are all the same thing. They are 10-year returns of the S&P 500. However, they are each from completely different periods (i.e. the time frames don’t overlap).
Specifically:
Investment 1 -7.5% (12/31/1968 – 12/31/1978)Investment 2 +159.0% (12/31/1978 – 12/31/1988)Investment 3 +342.6% (12/31/1988 – 12/31/1998)Investment 4 -26.5% (12/31/1998 – 12/31/2008)Investment 5 +177.5% (12/31/2008 – 12/31/2018)You see, in investing, it is easy to fool ourselves with cherry-picked statistics. You might have automatically assumed that one of the 3 big up decades was the “best” investment. But that’s just assuming that past is prologue. And if there was EVER a time when that is a risky assumption, it is now, what with mind-blowing global debt, geopolitical confusion and the U.S. stock market still within spitting distance of a 10-year high…which is evident when you look at the strong return of Investment #5 above.The other thing that stands out to me about this little exercise is just how cyclical S&P 500 returns and
equity investmentreturns in general are. That should wake up any investor who plans to retire within the next 10 years. After all, if you are counting on more than doubling your retirement savings the next 10 years, there are lots of signs above that you may want to consider something other than “set it and forget it” investment approaches. After all, 2 of the past 5 decades (when we start with the 1968, 1978, etc. instead of 1970, 1980, etc.) have been negative.Related:
We’re in a Danger Zone for Investors Over the Long-TermI am a big advocate for having a
long-term investment strategy. However, where I think investing gets oversimplified these days is where you assume the market will just bail you out. As you can see, that’s a dangerous assumption.
So, what’s the alternative?
Understand that markets are inherently cyclical Use equities in your long-term portfolio, but don’t just do so in a “skin-deep” manner. To put it another way, use equities but don’t abuse them by convincing yourself that over time, the S&P 500 Index always appreciates. Find a comfortable balance between stock market-driven investments and investments that either do not move in sync with the stock market, or move in the opposite direction of stocks, thus hedging your retirement savings risk. Invest across multiple time frames, regardless of precisely when you expect to use the money. Long-term investing combined with “tactical” investing that incorporates a less-patient, more risk-managed approach is a “higher percentage shot” for most investors in an era of electronic trading, automation and risky policy by global central banks like the U.S. Federal Reserve, which combine to create and deflate bubbles each decade.Remember that quick game we played today, and think about how you should alter your thinking for the next 10 years that started last month. That will help you to avoid a “game over” situation with your retirement plan.Follow us on Twitter by clicking
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