When Average is Not Average

When we discuss future expected investment returns from US stocks, we say you should assume you will earn around 8-10% per year.

If you ask most other investment professionals, they would likely say the same thing.

In fact, from 1926-2017, the annualized return of the S & P 500 Index (1) was 10.2%. This is without any fees.

This means that over the past 92 years, the S & P 500 averaged just over 10% per year.

Amazingly, while it is widely stated that large US company stocks earn around 8-10% per year, the S & P 500 Index has never actually earned between 8-10% in any calendar year since 1926.

For some reason, the S & P Index has not had many years that are actually average. The returns diverge from their own “average.”

In years of discussions and past blog posts, we have explained that the actual year to year returns of the S & P 500 will vary greatly, as some years will be much better than 8-10%, some years will be much worse than 8-10%. Some years will be slightly better or worse than average. And we’ve always said that the future annual returns would not normally be right around 8-10%. But I didn’t know until this week how accurate that statement really was.

The closest actual return to the 8-10% average was in 1993, when the Index returned 10.1%. In 1992, the return was 7.6%.

As the chart (2) below shows, despite the wide dispersion of calendar year S&P 500 Index returns between 1926-2017, the Index has been positive far more years than negative.  There have been 68 positive years and only 24 negative years.  
The year to year variance from the historical 10% average return is the temporary risk that investors in stocks need to be prepared for, in order to reap the long term benefits of stocks, as compared to holding cash, CDs or bonds. The volatility in short term returns is the perceived risk of owning stocks.

As we all know, past performance is no guarantee of future returns.

However, it is important to have reasonable expectations and use evidence (and not forecasts or predictions), to help deal with future uncertainty.

While it is interesting to know that US large company stocks have averaged just over 10% per year over the last 92 years,  and it is an oddity that the Index has never actually returned between 8-10% in any year, the greater lesson is that US stocks, and International stocks as well, move higher more often than they move lower.

If you remain disciplined and adhere to our investment strategy, you should be rewarded, be able to sleep well at night and have a greater sense of financial security.


(1) The Standard & Poor’s Composite 500 Index consists of 500 of the largest companies based in the U.S. The companies in the Index change over time. You should also realize that the companies within the S & P 500 have changed frequently over this period, as companies grow, fail, merge and get acquired.

(2) Indices are not available for direct investment and performance does not reflect expenses of an actual portfolio.  Past performance is not a guarantee of future results.  S&P data copyright 2018 S&P Dow Jones Indices LLC, a division of S&P Global.  All rights reserved.

Purpose and goals

We may underperform a major benchmark, the S&P 500*, this year, or in some other years.

We may outperform a major benchmark, the S&P 500, this year, or in some other years.

However, beating the S&P 500 every year is not our goal.

Our goal and purpose is to provide you advice and financial recommendations suited to your personal needs.

Our goal is to help ensure that you have adequate financial resources for you and your family’s lifetime.

For many clients, our purpose may be to help provide you with an annual income stream to live off of for the rest of your lives. This is a real and very important goal.

This goal, that you have adequate funds to live the life you desire, is accomplished over years and decades. It is not determined by whether we beat the S&P 500 this year or not.

If your primary financial goal is to conserve or maintain your investment portfolio for years and possibly decades, for yours and future generations, we can advise you so this goal can be accomplished.

The key is that focusing on beating a specific benchmark is not how you accomplish these goals.

You are most likely to succeed in accomplishing these goals by working with a financial advisory firm (like ours), doing comprehensive planning, being disciplined and utilizing a consistent and proven investment philosophy.

Succeeding financially and meeting your goals is complicated.  You have to know how to react to the markets ups and downs, the impact of constantly changing tax laws, handle uncertainty and the constant barrage of news, opinions and predictions.  We help you deal with all these complexities.

We intentionally structure your portfolio to be very different than the S&P 500, as academic evidence has shown that over long time periods, a globally diversified portfolio outperforms the S&P 500, with less volatility.

Investing and financial advice can have many goals and purposes.

We want to understand your goals. We want to help you succeed financially, so you can reach your goals. That is our purpose. 

Talk to us. We have a proven approach that works.

Why we recommend the direct, not alternate route

Why we recommend the direct, not alternate route

We recommend investments which generally meet the following criteria. They should be:

  • Understandable and transparent
  • Diversified
  • Low cost
  • Tax efficient, if needed
  • Not dependent on one or a few managers
  • Not dependent on someone’s attempts to make forecasts or predictions, to be successful
  • Liquid, so you can get your money when you want to

For fixed income investments, this would mean high quality individual bonds or other securities, or bond mutual funds, depending on one’s portfolio.

For stock investments, we recommend asset class mutual funds of various types, which together provide a globally diversified portfolio, such as US Large Company, US Small Cap Value or International Large Value, just to name a few.

Diversification is critical in developing a portfolio, as research shows that with both stocks and bonds, a diversified portfolio can provide greater expected returns along with less volatility, over the long term. This can be accomplished very effectively at a very low cost.

However, many people are attracted to “alternative” investments, in search of even greater returns or the promise of reduced volatility and good returns.

Alternative investments have many names and types. Examples include hedge funds, private equity, and strategies with names like market neutral, absolute return, long/short equity or managed futures.

We base our philosophy on research and evidence. And the evidence is that it is nearly impossible to identify an alternative investment in advance that will consistently outperform over the long term, after factoring in costs and taxes.

Based on research compiled by Dimensional Fund Advisors, the primary stock mutual fund provider we utilize, publicly available alternative strategy mutual funds have performed horribly over the past 10 years ending December, 2017, as compared to the broad US stock and bond markets. See Exhibit 2* below, which details these results:

This shows that these alternatives had annualized returns of less than 1% per year, versus stock and bond returns of around 8% and 4% per year, respectively. Clearly most publicly available alternatives were not beneficial investments over the past 10 years. The exhibit shows the alternative investments net of their fees, whereas the indices are not reflective of fees. Thus, I’ve stated the indices returns as less in this paragraph, to account for some approximate fees.

We generally do not recommend alternative investments for many reasons.

  • They are almost always very costly, with expense ratios of 1.4% for public alternatives and 2% or higher for private hedge funds, whereas we can build a globally diversified stock portfolio for around .30%-.40%, depending on the allocation of the stock portfolio. That would mean an alternative strategy would need to outperform our recommendations by over 1%-1.7% per year, just to be even due to costs. That is hard to do.
  • Many alternative investments are hard to understand. They can be like a black box. We want to understand what we are investing in. With many alternatives, you don’t know what the strategy is…and it can change very frequently. What stocks are they shorting today (which means they are betting that stock will go down)? They may only report their holdings a few times a year, so there is a lack of transparency.
  • Another factor is often portfolio turnover. Greater portfolio turnover generally leads to higher tax costs for investors. The Liquid Alternatives in the study* above had a turnover of 200% per year, which means the portfolio is replaced twice a year. If they were successful, and turned over the portfolio that often, gains would be short-term capital gains, which are taxed at the higher, ordinary income rate. Again, a bad result.
  • Liquidity. We want you to have access to your money when you want it. With our current investments, you can get access to your money within a few days. Many alternatives, even some real estate investment funds, limit your ability to withdraw your money to quarterly or even a certain dollar amount per quarter or year.

While there may be some good alternative funds, the benefits they tout do not usually pan out over time.

When evaluating alternative investments, you should consider if it will add a beneficial element, that you don’t already have in your portfolio.

If it meets that criteria, can it really reasonably increase your expected returns or reduce your expected volatility? If so, how confident can you be of these assumptions?

And, will it be cost and tax effective?

We are confident that the criteria we stated at the beginning of the post are solid, reasonable and in your best interest. We evaluate new and different concepts, but any new investment we would recommend must pass those standards, at least as of today.




Whitepaper, Alternative Reality, Dimensional Fund Advisors, August 2018.


*Exhibit 2: Past performance is no guarantee of future results. Results could vary for different time periods and if the liquid alternative fund universe, calculated by Dimensional using CRSP data, differed. This is for illustrative purposes only and doesn’t represent any specific investment product or account. Indices cannot be invested into directly and do not reflect fees and expenses associated with an actual investment. The fund returns included in the liquid alternative funds average are net of expenses.  Please see a fund’s annual report and prospectus for additional information on a specific portfolio’s turnover and the expenses it incurs.

Liquid Alternative Funds Sample includes absolute return, long/short equity, managed futures, and market neutral equity mutual funds from the CRSP Mutual Fund Database after they have reached $50 million in AUM and have at least 36 months of return history. Dimensional calculated annualized return, annualized standard deviation, expense ratio, and annual turnover as an asset-weighted average of the Liquid Alternative Funds Sample. It is not possible to invest directly in an index. Past performance is not a guarantee of future results. Source of one-month US Treasury bills: © 2018 Morningstar. Former source of one-month US Treasury bills: Stocks, Bonds, Bills, and Inflation, Chicago: Ibbotson And Sinquefield, 1986. Barclays indices © Barclays 2018. Russell data © Russell Investment Group 1995-2018, all rights reserved.

Standard deviation is a measure of the variation or dispersion of a set of data points. Standard deviations are often used to quantify the historical return volatility of a security or a portfolio. Turnover measures the portion of securities in a portfolio that are bought and sold over a period of time.

How long can this positive streak continue?

For 9 straight calendar years, the US stock market has gone up, with no down calendar years, as measured by the S&P 500. The S&P 500 is an index of 500 of the largest publicly traded companies based in the US.

By some people’s measure, on August 22, this will become the longest bull market in history, at 3,453 days.*

Should you be concerned about this 9 year positive run?

When will it end?

Is the US market heading into a bear market, which is defined as a decline of over 20%?

Let’s define a few things and give some perspective to these issues.

While the above statistics are accurate, the broad US Stock Market has not gone straight up during the past 9 years. There have been a number of major declines during this period.

  • From the Spring, 2011 to September, 2011, the S&P 500 dropped by almost 20%, depending on how it’s measured.
  • From May, 2015-February, 2016, US markets dropped around 14% and International markets and many individual stocks did far worse.
  • In early 2018, stocks dropped about 10% in less than two weeks, then again began their ascent to record levels.

Thus, while the chart below of the last 10 years of the S&P 500 shows a picture that generally looks like an easy ride, actually living through it was much more difficult.**

If you look at the S&P 500 chart of the last 12 months, you will see there were lots of up and downs…it wasn’t all smooth sailing…there have been plenty of choppy waves to deal with. **

What these pictures reflect is the benefits and importance of our long-term view of investing. Despite some significant down periods, if you remained disciplined and patient through the bleak years of 2008-09, and some of these down periods of the last 9 years, you have been very well rewarded.

As clients and long time readers of this blog know, we do not advise investing only in the S&P 500. Over the long run, a more diversified global portfolio has outperformed a portfolio of only the S&P 500. This more diversified portfolio, as we recommend, would also include small companies in the US and companies of all sizes around the world.  Please see this prior blog post, for more information on the benefits of global diversification.

Despite the long positive run of stocks, there will be a “next” downturn and many to follow that one. There have been articles in the media trying to identify what the cause of the next market downturn will be. There are always forecasters predicting imminent doom and the next crash.

None of these predictions will help your financial future. No one can accurately predict the future. No one can accurately and consistently time when to get out of stocks and then predict exactly when to jump back in at the bottom. The winning strategy is to remain invested in stocks, in an allocation that makes sense given your specific situation and goals.

While we do not see a crash of 20% or more in the very near future, the history of stock investing tells us that you need to be prepared for this to occur.

As we like to remind our clients, declines are an expected part of investing in stocks, which often occur when we don’t expect it. For example, US stocks have had a 20% or significant decline at least once every 5 years since World War II. If you count 2011, this still holds true.

A significant decline is not an if….as it will occur….the real question is when it will occur. There will be a major decline in the future, whether it is within the next 1, 3 or 5 years. After that, stocks will eventually reach new highs again at some point in the future.

If a major decline concerns you, there are things you can and should do. You should discuss this with us, so you and your portfolio are prepared for this eventuality. If you are financially comfortable and are still concerned or want to avoid some of the decline, then you should consider reducing the stock allocation of your portfolio now.

If you think the bull market will come to an end and you are more focused on preserving your capital, then you should be making changes to your investments…..now, not when you “think” the bull market will end. For example, if you are in retirement, are “set” financially and don’t need to take major risks with your investments, then now is the time to talk and take preventative action. Now is the time to plan and implement how to re-allocate some of your portfolio if you want to lessen the impact of the temporary losses that will occur in future downturns.

If you are younger or need to be more invested in stocks for the long term to be able to reach your financial goals, then you need to be emotionally prepared for the temporary downs and ups that will occur within your investment portfolio.

The keys are…..

Markets will go down.

That should be expected.

When they will go down is often unexpected.

Markets will eventually recover and reach new highs again….we just don’t know how long that will take.

If dealing with these decline concerns you, or you are more focused on capital preservation, then you likely have a greater stock allocation than you should have. You should talk to us to review how you should modify your portfolio.




*Zerohedge, Get the champagne out For US stocks:  In 14 Trading Days This Becomes The Longest Bull Market Of All Time , Tyler Durden, 08/03/2108, https://www.zerohedge.com/
**S&P 500 indices, per screenshots for the 10 years and 1 year period ending August 8, 2018, respectively.

You worry and we respond

Everyone has some type of financially related worry, concern or question.

  • It may be when can you retire.
  • You may want to know how much you need to save to be able to retire.
  • You may be concerned whether you will have enough money to live on for the rest of your life.
  • You may be concerned about how you will handle your finances if your spouse dies.
  • You might want to know, once you retire, how you will get the money you need from your investments.
  • You may want to know how much money you can spend annually, given your current or future investment portfolio.

Regardless of what your specific concern, worry or question is, it’s our role as your trusted advisor to understand your concerns and to address them with you.

We will provide you answers in clear English, not technical jargon. When I go to see my doctor, I want to be able to understand them. I want to easily understand what he or she says to me. Clearly. The first time.

We strive to answer your questions and explain these issues, regardless of how complex they are, in this fashion.

Over the years, our clients have told us that we excel at this. We are proud of this feedback and really strive to meet this service goal.

We know that investment performance is always vital and relevant. But in many of our meetings with clients and prospects, we tend to spend the majority of our time discussing topics such as those above, to address your real concerns, issues and questions.

We know that financial matters can be complex and appear very complicated. We also know that the stock market and investing can be fraught with uncertainty, fear and risk. We help you handle this.

It is our role to make complicated matters understandable.

Based on our extensive experience, we can provide you with confidence and greater assurance, even with future uncertainties.

It is our role to listen to you, understand you and provide you with advice and recommendations that will help you to have less worries and financial concerns.

We continuously strive to meet these objectives.


In late June, I wrote a blog post titled “What we know and don’t know.”  I suggest you read or re-read it again now, as it is quite relevant to this blog post.