I have received many calls and questions from clients, friends, and family about how bad things were in 2022 and what they think is going to happen in 2023. I do not blame them. With the global pandemic, rapid inflation, the war in Ukraine, and the volatile stock and bond market, it is reasonable to feel uneasy.
If you had knowledge of future events for the year 2020–2022—but did not know where the stock market would land—what would you have predicted? Probably not the 25% positive return that we saw. Investing in the stock market can feel like a roller coaster ride. But the truth is that it is normal. Learn more in this episode of Best in Wealth!
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Outline of This Episode
- [1:08] Do you have kids in sports?
- [3:19] The stock market can be a roller coaster
- [9:14] Taking a closer look at 2020–2022
- [16:46] How can we explain normal returns?
- [18:28] What do you think will happen in 2023–2025?
The stock market can be a roller coaster
Experts get paid millions of dollars to make predictions about the stock market. But no one knows what will happen. And despite the market being down 19% last year, the three-year average (2020–2022) was up almost 25%. How? Because the stock market was up in both 2020 and 2021 before we hit the decline in 2022.
Let's look at the range of returns of the S&P 500 in the last 97 years:
- In 21 years, the stock market landed up 10-20%
- In 16 years, the stock market landed between 20–30%
- In 15 years, the stock market landed between 30–40%
- In two years, the stock market was up between 50–60%
In 1933, the stock market was up over 55%. But the flip side was rough.
- There were 14 years the stock market landed between 0–10%
- There were 14 years the stock market landed between -10–0%
- There were six years the stock market landed between -20–00%
There was one year when the stock market ended down 45%. As you can see, stock market returns land in quite a large range. The best prediction of what will happen next year is a random draw from the last 97 years.
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A closer look at 2020–2022
In 2020, the stock market ended up between 10–20%. In fact, 2020 was part of a
21-year run of the stock market ending between 10–20%. In 2021, the stock market landed up 20–30%. Then 2022 hit. The stock market ended between –10–20%.
There were only six years in the last 97 years that the stock market landed in that range. The last three years were a great representation of the history of the stock market. Sometimes we take two steps forward and one step back.
From 1926–2019, the average return of the S&P 500 index was 10.2% per year. The average return on the one-month T bills (a “risk-free” asset class) averaged 3.32%. The equity risk premium was 6.88% per year. That is the reward you get for investing in the stock market.
But what about the last three years? The average compounded return was 7.66%. The average return on the one-month T bills averaged 0.64%. The equity risk premium was 7.02%. That is higher than the average of the previous 94 years! The return you received for your risk was virtually the same. In retrospect, the last three years have been
normal.
How can we explain normal returns?
How can we explain normal returns when it feels like the world is falling apart? The stock market is a giant information processing machine. When bad news comes in, prices drop. When good news comes in, prices rise. The stock market sets prices to get investors to invest. If there was a negative expected outcome every day, no one would invest. The stock market is constantly changing.
And as humans, we are constantly trying to figure out how to get back on track. Innovation continues to happen at incredible speeds. Businesses adjust. We will make better products and better services with greater speed. Profits exist and fuel the stock market.
One of the most important principles of investing is being a long-term investor with a plan that you can stick with. The stock market will go up and down. It always has and always will. If you felt like you needed to bail out, your plan may not have been right to begin with.
Do you have a plan that you are confident in?
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Podcast Disclaimer:
The Best In Wealth Podcast is hosted by Scott Wellens. Scott Wellens is the principal at Fortress Planning Group. Fortress Planning Group is a registered investment advisory firm regulated by the Securities Act of Wisconsin in accordance and compliance with securities laws and regulations. Fortress Planning Group does not render or offer to render personalized investment or tax advice through the Best In Wealth Podcast. The information provided is for informational purposes only and does not constitute financial, tax, investment or legal advice.
