The Unpredictability of Annual Returns – and What to Do About It

Setting annual goals for your portfolio’s performance – given the utter randomness of annual gyrations of the markets – is not logical. Adviser Doug Buchan explains why and what you should do instead.
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By Doug Buchan, CFP®

Every year, the genius prognosticators on Wall Street predict where the market will go in the following year, and every year – on average – these tarot card readers come up with a range of somewhere between 8%-10%. And every year – like clockwork – they’re wrong. Wait, every year they’re wrong? Hold that thought.

The “market” – which we’ll define as the S&P 500 Index (although it is nothing close to the “market,” a topic for another day) – has indeed averaged about 10% per year since 1926.

Doug Buchan

Doug Buchan, CFP

Ok, so we’ve averaged about 10% per year over the past 95 years. But how many times has the market actually returned, say, between 8%-10% in a given year?

It’s not a rhetorical question; I actually want your guess. We’re talking about 95 years. That’s 95 years in which the S&P 500 has averaged 10% per year. So, how many times since 1926 do you think the S&P 500 ended a calendar year up between 8%-10%? Take your time. Don’t just blurt out the first number that comes into your head, jeez….

Next question: Over these same 95 years, how many times do you think the stock market returned greater than 20% (like in 1997, when it returned 38%) or less than negative 10% (like in 2008, when it lost 37.0%)?

Take some time to think about it. Write both these answers down on a sheet of paper (or keep them in your head).

Drum roll … the answer to the first question is ZERO. That’s right, the S&P 500 has NEVER returned between 8%-10% in a calendar year. I know, it’s completely ridiculous. I had to fact check this at multiple sources. It came really close in 1993, when it returned 10.1%, and, oddly enough, the next closest result was the year earlier, in 1992, when it returned 7.6%.

Almost every year, the “experts” predict the market will go up between 8%-10% because a) market predictors are clueless, and b) they think it’s a safe guess. In reality, their “safe guess” points at something that has never happened in 95 years.

The answer to the second question is … wait for it … 45 TIMES! Wait, what? 45 times! Yes, in 45 of the last 95 years (or 47% of the time), the S&P 500 has returned either greater than 20% or worse than negative 10%. Well, that’s got to be because of the Great Depression and then its aftermath, and the old days simply had more volatility, right? No, not right. Since 1973, the S&P 500 has been up greater than 20% or down 10% or more in 23 out of those 48 years, or, you guessed it, 47% of the time.

What’s the takeaway for folks thinking about retirement? Simply put, understanding which goals are worthy of your attention and which goals should be looked at through a new lens will not only give you a better chance of financial success, but may also provide a new perspective toward the cacophony of short-term financial noise that surrounds us all.

Setting monthly goals for certain things makes a whole lot of sense. Many bills come in monthly, so monthly budgeting is a wise endeavor. Setting annual goals for certain things also can make sense. How much you have saved relative to your income is a wonderful goal to track each year. Did you take as many vacation days as you wanted? Another great annual goal to track.

That said, setting annual goals (or, heaven forbid, quarterly goals) for your portfolio’s performance – given the utter randomness of annual and quarterly gyrations of the markets – is not logical. Logic is an interesting thing, though. My years of experience with clients, friends, family and even colleagues continue to show me that logic fades as unexpected outcomes happen. Put another way, the bigger the surprise, the more logical decisions will flow to emotional decisions. So, the best thing you can do is simply to expect some serious storms from time to time.

Digging into the weeds of your portfolio every quarter is sort of like digging up the roots of a tree to check on its health. You won’t learn much – if anything – and you very well may harm the tree (especially if you dig up those roots during one of those serious storms).

Your portfolio’s annual progress is much more random than the growth of that tree, so digging into its roots is not going to teach you much (and, again, you may very well harm “the tree”). I’d encourage you to stop looking at annual performance as some sort of goal, or as some sort of yardstick for success (or failure), or as some sort of controllable outcome. I’d encourage you to accept the folly of trying to garner some sort of wisdom regarding your financial wellbeing from quarterly performance.

Try to start thinking in decades when it comes to investment performance. Or, once you have a solid plan in place and a reasonable investment strategy to align with your plan, stop thinking about performance at all. Instead, maybe spend some time in the shade of a tree planted long ago with the controllable things most important to you in mind.

About the author: Doug Buchan, CFP®

Doug Buchan, CFP®, is a Wealth Advisor with Buckingham Strategic Wealth. He works to help his clients make smart choices with their money so they can live the life that is most important to them.

Important Disclosure: Returns data is from the Dimensional Matrix Book. The opinions expressed by featured authors are their own and may not accurately reflect those of Buckingham Strategic Wealth®. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice. Individuals should speak with qualified professionals based upon their individual circumstances. The analysis contained in this article may be based upon third-party information and may become outdated or otherwise superseded without notice. Third-party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio nor do indices represent results of actual trading. Total return includes reinvestment of dividends and capital gains. IRN-21-1679

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