Road to Retirement: Understanding the long run

With financial markets falling this year and investors getting nervous about when a recovery will arrive, you often hear investors say, “just stay the course because, in the long run, markets recover.” That has been true historically and there is good reason to believe it will remain true. Basically, given enough time, financial markets recover. But how much time is enough time?

All we can really do is look at history to see how markets have done in the past. That will give us a rough estimate of what we might experience in the future. And of course, markets can exceed whatever parameters they set in the past. It’s not as if the past shows the limits of market volatility, just the rough range of what you might reasonably expect. It can always be better or worse than that.

These days, when I hear economists and market strategists talk about the “long term,” they often discuss it in terms of either several months or a few years. You might hear someone say, “six to 12 months from now the market should bottom,” or “within a year or two, markets should recover.” And because we mostly hear economists and strategists talk in these timeframes, many investors likely think that a potential recovery cycle will happen sometime between six months from now to a couple of years. Again, that’s reasonable because that’s when most recovery cycles do occur. But the long term can be longer than that, and you should know the numbers.

In the U.S., we have had a number of difficult market cycles where stocks took more than a few months to a few years to recover. Since 1926, we’ve had 12 calendar year cycles where stocks had a negative total return for five years. We’ve also had four calendar year cycles where stocks had negative total returns for 10 years. One of those cycles ended in 2009, so it’s not ancient history.

We also have examples of other developed stock markets that have stagnated for longer periods. The classic example is Japan. Its stock market peaked in the late 1980s and hasn’t seen those peak values since then. In Europe, they have a stock index called the Stoxx 600, which is similar to our S&P 500. Since the year 2000, it’s had less than a 1% annualized price return.

These are modern stock markets that have sophisticated investors and sophisticated regulators overseeing them. But their economies and markets got stuck in a cycle of low productivity, low growth, and excessive central banker and government intervention. Despite everyone’s good intentions, things haven’t worked very well.

I have no idea if we’ll go down this type of path in the U.S., but there are factors converging that make something like a long stagnation more likely. Consider that from 2000 through 2019, the total annualized return from U.S. stocks was just a little more than 6%. That’s one of the weakest 20-year cycles in history. And it came after 12 years of massive support from the Federal Reserve that many believe served to pump up financial market values. If you remove that support, the future looks a lot more uncertain.

When markets get into a stagnation funk, they usually don’t go down and stay there. Often, the cycles have been comprised of big rallies and declines, but when you net it all out, things didn’t move much. By the time you realize that what you experienced was a longer stagnation, there likely isn’t much you can do about it.

Why am I bringing this up? It’s to keep you grounded in the realities of markets. They aren’t always there to bail you out. So, what can you do about it? The number one thing is to keep your financial house in order. Live squarely within your means, don’t carry credit card debt, pay off your long-term liabilities like your house and auto loans, and save a healthy amount of your salary every year, somewhere in the 12% to 15% range.

I know many people think it’s not possible given the cost of housing, autos, and education, the list goes on and on. There’s no doubt that there are many challenges and barriers to saving out there, but you can make choices. For instance, you can choose where to live, and today employees have more flexibility than ever. The median home price in Kansas City is about $240,000; in San Diego, it’s $860,000. Nice weather is expensive.

When you are younger and building your finances, it’s important to set yourself on a sustainable path. If you get off course and don’t realize it until you’re 55, it’s hard to fix. There just isn’t enough time. Markets aren’t always there when you need them to boost the value of your home or your 401(k) by large amounts. In some cycles, you have to do most of the heavy lifting. Just something to think about as investors anticipate the next Fed bailout and bull market run.

Charlie Farrell is a partner and managing director at Beacon Pointe Advisors LLC. The information contained in this article is for general informational purposes only. Opinions referenced are as of the publication date and may be modified because of changes in the market or economic conditions and may not necessarily come to pass. All investments involve risks, including the loss of principal.

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