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Robert M. Cheney, CFA, CFP®



Featured Wealth Management Article

The Next 20 Years for the Stock Market Could Equal the Worst 20-year Period on Record

by Robert M. Cheney, CFA, CFP® Dated 10/04/2017

An attention grabbing headline, right?  People love forecasts…, but read on, this forecast may not be as bad as it sounds.

Many market strategists and those in the financial press currently have a negative outlook for the stock market; they say the market is overvalued, or the current 8-year bull market is “long in the tooth.” They are correct that if the S&P 500 Index continues positive for full-year 2017, which currently appears quite likely, it will tie the 1991 to 1999 period for the longest yearly win streak for the S&P 500 Index on record. But instead of taking the short-term, quarter-to-quarter mindset of market strategists or the financial media, let’s try to take a broader perspective.

Most investors who are not traders, particularly those coached by advisors, have a 20-year, long-term time horizon for their investments. What if we had invested in the worst 20-year period on record? If we had been unfortunate enough to invest in the US stock market at the beginning of 1929, we would have had to endure the stock market crash of 1929 right off the bat, then the Great Depression, the New Deal, World War II, and an increase in top income tax rates from 25% to 63%! These events would seem catastrophic to capitalism and detrimental to positive equity returns. Yet, this worst 20-year period concluding in 1948 still rewarded investors in the US stock market with a return of almost 3% per year. To put that in perspective, $1,000,000 compounded at 3% per year for 20 years becomes $1,806,111, almost double the original investment, and certainly better than our current rate of inflation or that of savings accounts. This 3% return does not sound great compared to current equity returns but it is not bad for all that happened during that period and considering it is the all-time worst 20-year period for US stock history.

What if we invested in a 20-year period that included the Cold War, Black Monday, the savings and loan bailouts, the Persian Gulf War, the Mexican Peso collapse, the Asian currency crisis, the Russian financial crisis, and the failure of Long-Term Capital Management, one of the largest hedge fund collapses in history? Headlines can be deceiving. During this 20-year period from 1980 to 1999, an investor would have been rewarded with just over 17% return per year, making it the best 20-year period on record. To put that return in dollar terms, an investment of $1,000,000 would have grown to $23,105,600.

When we look back at headlines over the past 91 years between 1926 and 2016, it is hard to believe that all 72 of the 20-year rolling periods had a positive rate of return. But they did. In fact, the average of all the 72 different 20-year periods between 1926 and 2016 is 10.91% per year, a very handsome return. The research providing the findings for these 20-year periods was completed by the Center for Research in Security Prices at the Booth School of Business, University of Chicago, through construction of the CRSP 1-10 Index that included all frequently traded US stocks on major exchanges.1 As the disclaimer goes, past performance does not guarantee future results, but 91 years of market history does guide our investments. I am not advocating that investors throw caution to the wind, invest all their funds in stocks and then stick their head in the sand for 20 years. However, I do recommend that investors not give undue focus to short-term headlines, valuations, or market forecasts about “bad times to invest.”

In reality, investors do not typically invest all their funds on one day and withdraw on a single end date. People usually gradually add to savings during a career and then gradually draw down savings, not just a complete liquidation on the day of retirement, which makes returns trend toward the average during the overall, extended investment horizon.

The active fund management industry (most mutual fund companies) is incentivized to have investors over-value the need for short-term investing rather than long-term investing. If people believe they need an active stock or fund-picker or an active fund manager to save them from an imminent bear market, they will be more likely to tolerate the active management fees, which are generally higher, often multiples higher than passive fund fees. History shows us that market strategists, economists and active managers all have a poor track record of forecasting the economy and financial markets. Long-term investment over the last 72 different 20-year periods has shown that we should let the stock market work for us over the long-term and be mentally prepared that we may need to endure rough times along the way.

It could be that we experience a crash in 2018 just like at the beginning of the 20-year period starting in 1929. It could be that the bull market keeps raging forward and establishes new absolute records and records for duration. It could also be that we only experience a mild setback of -3.1% as occurred in 1990 and then enter another extended bull market. When we look past this mild 1990 setback, the 18-year bull market of 1982 to 1999 would be by far the longest on record. We just do not know what the future will hold.    

An investor would be much better served to worry less about valuations, forecasts, and market-timing and instead focus more on what can be controlled in his or her broad financial planning. This investor, or investor along with his or her advisor as a team, should establish financial planning goals and stay on track, confirm that the risk assumed in the portfolio is appropriate for his or her risk appetite, rehearse what actions and attitude will be taken when there is a correction or bear market, ensure that financial risks are insured or covered, maximize tax efficiency, protect assets and plan for estate preservation. Long-time Wall Street Journal Intelligent Investor columnist Jason Zweig summarized this guidance succinctly: "So you should hire an adviser not for his or her investing prowess, but to help organize your finances, prioritize your goals, minimize your taxes, and navigate the shoals of retirement and estate planning. Done right, those services can make you far richer — and happier — than the pipe dream of investment outperformance is likely to."2

1 Source: US Stock Market represented by the CRSP 1-10 Index. CRSP data provided by the Center for Research in Security Prices, University of Chicago.

2 Source: Wall Street Journal, “Don’t Touch My Money, Just Hold My Hand,” by Jason Zweig, June 9, 2017.

Investing involves risks including the potential loss of principal. No strategy can assure success or protects against loss. Past performance is no guarantee of future results.  The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. Indices are unmanaged and cannot be invested into directly.