Money Talks: History of market returns

William F. Hague

As we all know here in paradise, history doesn’t always repeat itself, at least not weather wise. We have seen cold winters, dry summers and everything in between. Although there are trends, nothing is set in stone.

Candle stick graph and bar chart of stock market investment trading.

The very same can be said for the history of investing and market-based returns. Far too many retired investors seem to have selective memories as to their true performance over five, 10 and even 15 year windows. Surely the case can be made that it is difficult to track such performance numbers on an individual account basis. The general consensus is that that the majority of professional money managers, including mutual funds, generally perform in line with the major market indices, such as the Dow Jones and the S&P 500.

More:Money Talks: Interest rates impact the markets

What is lost on many is the fact that statistically, the vast majority of actively-managed portfolios underperform the market. According to The Financial Times, the UK-based publication similar to our Wall Street Journal, “99 percent of actively managed US equity funds have failed to beat their benchmark since 2006.” The startling research goes on to state, "active fund managers have come under scrutiny for charging investors high fees for poor performance.”

The point here is that regardless of what investors may perceive, most rarely outperform the markets; unfortunately, most investors are greatly misinformed as to their overall performance over the long term.

When we reference the past performance of the Dow Jones or the S&P 500, the point is clear; investor’s relative performance has likely been either in line with or below the numbers we see on the charts.

For instance, recently we referenced a chart by where we saw the effect of steadily-rising interest rates from 1965 to 1982 act as a catalyst for the unprecedented 75 percent drop in value for the Dow Jones during the 17-year period. With numbers like that, it is amazing that Wall Street ever convinced any retirees to return to the stock market. This was a case of interest rate-driven market losses.

Fast forward to the most recent market crash of 2009 and we see quite a different picture. As referenced last week, investors experienced a market crash based on completely opposite factors. In 2009, ultra-low rates and “cheap money” were the catalyst for a market meltdown vs. the ultra-high rates and “unaffordable money” meltdown from 1965-1982.

Again, here it is important to realize that virtually all actively-managed funds experienced similar performance during these periods, regardless of what their advisors want them to believe. Yes, the numbers never lie.

Stepping back and observing the chart information, there is a direct correlation to the Dow Jones lows of roughly 2,000 in 1981 to today’s levels around 21,000 moving in the exact opposite direction of The Fed Funds rate. With a Fed Fund high of roughly 21 percent in 1981 followed by a steady decent to a low of roughly 0.06 percent in 2014, we can clearly see stocks and rates moving “lock step” in opposite directions.

Of course, the stock market endured two separate market crashes in both 1999 as well as 2009. The point here is not to confuse, rather to illustrate the complex nature of attaching any one catalyst to any given market direction. (See true diversification.) Of course, the last four decades do illustrate a strong correlation as to the negative effect that rising rates can have in the modern era of money management.

Now entering our 10th year of record-low interest rates we can establish, based on our empirical knowledge, two givens: first, interest rates can only go up from here; second, there is a very real possibility that based on inflationary pressure, rates may continue to rise to a point which could reverse the “artificial stimulus” rally we have observed over the last seven years.

Educated investors have been proactive in allocating alternative assets such as insured index investing and managed futures in order to potentially thrive in any market condition, which certainly leads to the life of a SWAN: Sleep Well At Night.

William F. Hague is a managing partner of Hague Wealth Management; 239-389-1999 or The opinions and observations stated above are those of the columnist.