As it turns out, Amazon doesn’t carry those, so we put a unicorn horn on our yellow lab Jobi and pretended she had magical powers. It worked for a little while (about 5 minutes) until she decided she didn’t want to wear the horn anymore and lost her magic. It sure would be nice to have those powers these days to see what the future holds for the markets. It’s been a really tough year for investors, but it’s not unlike some other periods in history. It got me thinking about all of the events investors have withstood over the years. For example - what if I told you that over the next 10 years, the following would happen?
• Oil Prices will increase by 491% • The total U.S debt will increase by 139%
• Gold prices will hit their lowest level in 20 years • Amazon stock will lose over 90% of its value
• The 4th largest bank in the U.S. will go bankrupt
• The U.S. will go to war
• One of the worst natural disasters in U.S. history will occur, causing $108B in damages and 1,200 dead
• We will experience the warmest decade on record since records were kept back in 1850
• Israel will go to war
• The largest earthquake in 40 years will kill 230,000 people on the day after Christmas
• There will be a 127% increase in the unemployment rate
• We will have 3 consecutive years of declining stock prices for the first time since the Great Depression. Investors will begin losing hope that things will ever get better and consumer sentiment will hit a 20-year low
• The use of anti-depressants in the U.S. will double
I can’t imagine many people would want to invest knowing all of that. You may have already guessed it, but all of these events occurred during the 2000-2010 decade. We had the dot-com-bust, 9/11, and the global recession of 07-08. Investors saw the values of their stocks drop, real estate decline, some lost their jobs, and worst of all some lost loved ones due to war. Negative headlines definitely overshadowed any positive developments. So, given all the bad, how did a diversified portfolio* perform over that time period?
…7.4% average annual return!!
Interestingly, during that same time period, the S&P 500 (Large U.S. stocks) only returned 0.40%. Growth stocks like Amazon went through very volatile times but wound up being among the best performers years later. Even after losing 90% of its value early in the decade, it finished 2010 being up 162% from its starting point in 2000.
Like most things in life, investing isn’t easy. If it was, we would all be millionaires. It takes discipline and grit to get through down years. There are many investors who simply gave up on the markets during that 10-year time period and missed out on building wealth. They will never get that time or those dollars back.
Today, we have rising oil prices, stock prices declining (especially for growth investments), war, and the worst consumer sentiment readings in 40 years. The Federal Reserve has made it clear they will do what it takes to bring down inflation, just like Paul Volcker did in the early 1980s. This means they will continue to raise rates until inflation is deemed to be under control. It’s important to remember that markets are forward looking and so bonds and stocks have already priced in the likelihood of future rate hikes into current prices. Of course, things can get worse, stay the same, or they can get better. Based on the recent consumer sentiment readings, it seems that it would be likely things get better going forward even though it may take some time.
Unfortunately, the unicorn horn didn’t work for me, so I don’t know what’s in store for the next 10 years. I do know that it’s human nature to focus on the bad. The pain of losses is more acute than the pleasure of gains. It’s easy to forget all the good things that happened over that decade including significant developments in technology and improvements in quality of life across the world. Future returns are uncertain because the future is uncertain. However, even during tough times, those investors that stayed the course were rewarded with attractive returns.
*Historical Return Data from the Dimensional Fund Advisors 2016 Matrix Book. Dimensional Core Plus Wealth Index Model. 60% stock / 40% bonds with rebalancing
Congratulations to Sam who recently got engaged while on a vacation in upstate New York. We wish Sam and Laura all the best in their future together!
Meet Jeffrey Hegedus
Meet Jeffrey Hegedus Jeffrey is the newest team member at Milestone! Jeffrey has previous experience in the financial industry formerly working for Vanguard. He is on a multi-year training track at Milestone to be a financial advisor. He is very involved in gathering and inputting financial data and preparing projections. Outside of work, Jeff loves to travel with his wife, Victoria and recently visited Madeira, Portugal!