Money Talks: Record territory requires new math
Time sure flies as we slowly wrap up yet another record season here in paradise. Speaking of records, let’s look closer at the stock markets.
As we continue to bring both clarity and transparency to the world of money and investing, it is critical for investors to keep perspective as we continue to watch the spectacle that is “The Trump Effect” and the record run on Wall Street.
The first and perhaps most glaring example of record territory requiring new math would be the unprecedented run with the stock markets. As we continue to reach record highs with both the Dow Jones as well as the S&P 500, many retried investors have become numb to the concept that at some point, history tells us that we should expect some type of cooling off with both stocks and bonds.
There are two schools of thought here and certainly both bear a closer look. The first is the school of “The sky’s the limit” and that “trees really do grow to the sky.” And for the record, until we see some type of market catalyst, this should continue to fuel this eternal optimist attitude. As we move into the 8th year of this bull market, each passing day sends us into yet another record as to the time between market corrections. Yes, as we sit comfortably around the 20,000 levels with the Dow, now would be a good time to review the numbers as to where are as related to where we have been. In other words, total market returns during the 2000’s may be surprising to many retried investors, even as we sit at all-time highs.
As difficult as it may be for investors to wrap their collective minds around it, the reality is that back in 2000 the Dow touched 12,000 for the first time. Now, if we fast forward to today’s levels and do some basic math, we can calculate a compounded total return of roughly 70 percent. No, that is not a typo. If we simply take 12,000 and add 70 percent we establish a Dow level of 20,400. Now if we take this calculation out even further, we can establish an annual total return year by year of roughly 4.1 percent per year. Again, 70 divided by 17 years gives us this magic number. Now, for many retired investors, certainly the last 8 years often skews investor’s perceptions versus the realities.
Now, let’s consider the reality of the future when, at some point, the markets experience some type of corrective action. Consider a more historic correction of roughly 20 percent. This, of course, is giving the markets the benefit of the doubt as the last two major corrections, or crashes, were in the 50 percent range in both 2000-2002 and 2008-2009. Here is where the new math takes on a completely different perspective for those who have been fully invested during the entire market cycle.
If the markets had so much as a simple and historic average correction of approximately 20 percent, we would experience the Dow Jones around the 16,000 levels. This effectively would drop the total compounded returns from 2000 to roughly 40 percent during the entire 17 year period; Again, extrapolate this even further by dividing 40 by 17 years gives us an average annual return of roughly 2.3 percent per year. Sorry, the numbers never lie.
The concept here of analyzing the new record territory math is to allow retired investors to embrace the reality of potentially low single digit returns during the last seventeen years of retirement. When we consider how many investing years we may have during our entire retirement, we can see the importance of long term planning as opposed to blind portfolio management. (See buying a bunch of stocks and crossing our fingers).
In order to maintain and preserve the total compounded returns over the last 17 years, now may be the time for investors to embrace the value of alternatives to the single minded ownership of stocks only. Alternative investments which have little to zero market correlation such as manage futures and insured index investing certainly can lead 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 WFHague@earthlink.net. The opinions and observations stated above are those of the columnist.