Ten years ago this week, the S&P reached its lowest point during the depths of the Financial Crisis. From its peak in 2007, the stock market fell an astonishing 57%, costing investors trillions of dollars. There are varying estimates for just how much was lost, but one estimate I read a while back put the total losses at more than $12 trillion. Let me say that again… Twelve Trillion dollars.
It’s hard to believe that the bull market that started in March 2009 is now 10 years old, the second longest in history. It is no coincidence that this is also the second longest economic expansion in history. While economic growth has been sub-par by historical standards, the duration of the expansion has benefited nearly everyone (albeit not equally).
The last decade has produced some of the best stock market returns in history. Below is a chart that shows the rolling 10-year returns for the stock market from 1960 through today. Meaning that at any given point on the chart, we are showing the annualized return for the previous 10 years. For example, as of today, had you been fully invested in the S&P 500 you would have enjoyed an annualized return of 15.1%. Believe it or not, that doesn’t even include dividends. The most recent 10 years is in the top 1% of all 10-year periods dating back to 1960. The only period that produced better 10-year returns was at the peak of the Internet Bubble in 2000.
I’m not suggesting that we are at the precipice of Internet Bubble 2.0. However, I would suggest that this is a good time to review your investments and set realistic expectations about may lay ahead. To think that the next ten years will look anything like the last would be a mistake. You should expect that there will be at least one recession over the next ten years.
Unfortunately, most investors won’t bother. The charts below shows the allocation to stocks and cash across all of the investment accounts at Merrill Lynch. They accounts for millions of investors so it is a good measure for how all investors are positioned. Back in 2007, things were good, the economy was expanding, and investors had 56% of their accounts invested in stocks and just 11% in cash.
Fast forward to early 2009 (when the market bottomed), investors had reduced their equity allocation down to 39% and increased their cash allocation to 21%. As the stock market rallied investors maintained a below average allocation to stocks until 2013. The result was that many investors panicked and sold at the bottom, only to watch the market bounce back without their participation.
Take this as an opportunity to level-set your expectations around your investments going forward. Are you comfortable with the investments that you own? Would you stick with them if the market fell 30%? What about 40%? How would you respond? What impact would a large decline have on your long-term plans? Would it impact your ability to retire? Fund your child college education? Buy a home?
There are no right answer to these questions; there are only right answers for you. Knowing them will have a dramatic impact on your investing success over the next ten years.