Vantage Point

It’s valuable to take a minute and reflect on how far the S&P 500 index has traveled over the years.  Annual returns dating back to 1928 may be viewed here.  Depending on how long you’ve been investing, some of these dates may be familiar.  We’ve witnessed expanding values and until recently it’s been tough to recall what contractions look like.  The following offers a brief glimpse at the past three decades.

It’s likely you remember February and March 2020 as the markets reacted to Covid 19 and a pandemic racing across the globe.  During this time, the S&P 500 index contracted over 30% in thirty days.  By the end of the 2020 calendar year the index had recovered and finished up roughly 16%.

December 2018 was the last significant annual contraction in the index with returns at -6.24%.  It would be another decade in the rear-view mirror, back in 2008 and the financial crisis, to see calendar year returns at -38.49%.  Annual returns for years 2002 (-23.37%), 2001 (-13.04%), and 2000 (-10.14%) were not kind to the 500 best companies in America.  The index was down -1.54% in 1994 and then -6.56% in 1990.

Chances are good that if you didn’t panic through those periods of time as an investor, it’s likely you may not be reacting now.  It’s also quite possible you weren’t investing as much then as you may be today.  Your income and ability to save and invest has likely increased significantly over the years.

I vividly remember the 2000-to-2002-time frame, it was ugly.  Tough for even the most disciplined investor to keep the faith and stay invested versus liquidating to cash.  It’s just not natural to continue to buy companies as their values shrink when compared to holding cash waiting for sunnier skies.

The market has a way of rewarding the patient long term investor who continues to buy and stands their ground.  Tuning out current market activity regardless of what’s going on and focusing on the big picture matters.  What we are experiencing today is no different.  Volatility in price matters less as your time horizon expands.  Think about that.

The 32-year timeline above is a similar period a couple in their 60s may experience into their 90s.  The most important goal for investors who are retired, or retiring, is relevant income.  Are my dollars pertinent to my shopping and spending habits today and tomorrow?  May I cover my essential costs in addition to discretionary fun like travel and big-ticket expenses?  May I make gifts to the grandchildren and rent a gigantic beach front house for all family to gather?  Is there enough to address health and wellness needs living independently for as long as possible?  Simplistically, investing today should be rooted in the ability of your portfolio to keep pace with rising costs.

What about shorter-term needs, say the next five years?  Taxable accessible cash in your bank account complements a well-diversified portfolio.  Investing in bonds and fixed income hasn’t made sense for decades.  Current pricing and yields are less compelling today than they historically have been.  Plain boring cash that is available allows for near term needs.  Not having to react by selling investments allows them to continue their compounding mostly uninterrupted.  Of course, rebalancing once a year is valuable too.

The average intra year decline, January 1^st to December 31^st, of the S&P 500 index is roughly 14% per year.  Year to date we are approaching a 20% decline.  What’s next?  Who knows?  Does it really matter if you have a plan and are looking at the bigger picture?

A diversified portfolio should have more companies than just the S&P 500 index.  Small to medium sized US companies in addition to all size international companies supports variety.  Each country is different from the next, capitalism and growth supply opportunities for expansion.

If you’d like to discuss your vantage point and understand more about what matters (and doesn’t) when planning and investing, give us a shout below.

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