September 15

Investments, Stock Market


Everyone talks about how the market has averaged 8%, 10%, 12%... whatever, some high percentage.

If you’re 20 years out from retirement, or 10, or 5, or worse: in retirement now… those ‘long-term’ historical figures can be incredibly misleading and relying upon them for your financial planning WILL lead to financial devastation for some. 

I’ll walk you through all the numbers so that you’re as prepared as possible… 


My Story

When we were younger, my sisters and I received some money from our grandfather. Our plan was simple: we wouldn’t touch it until the time came that we wanted to buy our first house.

That meant that the money would be growing for years in the background (managed by an Edward Jones representative, in fact) while we finished up our schooling. 

All three of us were interested in business and financial markets (likely influenced by that same grandfather's entrepreneurial success and legacy). From asking my mother for a Wall Street Journal subscription for my 12th birthday to starting and running my first store-front business at 17, I was obsessed.

My sister closest to my age got married and purchased a house near the tail end of the 2001-2007 stock market bull run.

Buy-and-Hold In Action

I had studied the stock market. I knew the ‘buy and hold’ mantra. I was disciplined.

As the market started to turn over near the end of 2007 and all through 2008, I was like a stone, immovable, without emotion. While the world around me was freaking out, this was my chance to prove my ability to disconnect from the chaos. 

I succeeded beyond all expectations.

I proved I had what it takes. I could ‘suck it up’ and ‘stay the course’ with the best of them even in the face of a roughly 50% crash.

The market started its rapid recovery in March 2009. I had remained ‘rational’ the entire time. I had not panicked in the slightest.

Needless to say, in that moment, I was proud. I felt like this was my first real test, and I passed!

In the summer of that same year, I got married to a very special girl. We lived in my tiny, 300-square-foot studio apartment for our first year of marriage, relishing all the money we were saving with our crazy-cheap, $250-per-month rent. 

My Time for the Money

In June 2010, it was time to upgrade.

I was starting to make decent money as a financial advisor, so we felt comfortable dipping into that investment account to help with our down payment.

It was then (and after a conversation with that sister) that I realized just how much less I was dealing with than she had.

When she had purchased her home in 2007, her investment account was more than 65% larger than mine was when I needed it in 2010.

I didn’t complain, nor was I at all upset (that’s not the point here). I was (and am to this day) very appreciative for my grandfather’s gift and hard work.

Instead, this was the beginning of my quest to find better ways to invest—to challenge the traditional financial paradigms.

It was the seed of my desire to critically consider any financial advice I heard (even if it was the common practice advised and accepted by academics and ‘experts’ alike).

But, for my case in point here, it was a slap in the face as to how much the timing of WHEN you need your money can impact your bottom line.

Financial Ruin for Tens of Millions

In truth, this reality was not a huge deal for me. It didn’t set me back in any way. This was gifted money, after all—money I wouldn’t have otherwise had. So, in my mind at least, whatever the balance, I was ahead.

For those preparing for retirement after decades of hard work and dedicated savings, however, that difference could be devastating.

Before this personal experience, I never really noticed this happening to others. But after that, for the next several years, I saw it everywhere.

The Baader-Meinhof Phenomenon

It was like the Baader-Meinhof Phenomenon (the so-called “frequency illusion”) where upon discovering some obscure bit of information, you start to see it everywhere. 

I had client after client come to me, needing to delay their retirement plans because of the 2008 market decline (some even had to come out of retirement and pick up part-time work as a Walmart greeter).

I’d see similar stories on the news and in the paper—it’s difficult to fathom the tens of millions that were affected in this same way. 

The frequency of these occurrences declined over the following years until in 2013 it wasn’t really talked about much at all anymore.

Wrong Place; Wrong Time

People who had been planning to retire in 2014, 2015, 2016, and so on, were relatively unaffected by that massive crash—or, at least, they had plenty of time to adjust and prepare for a different reality.

They weren’t slapped in the face by the same flip-of-a-coin, sucks-to-be-you, harsh reality as those with the exact same goals and circumstances from just a few years earlier.

The downfall of that earlier group was simply the fact that they were just a few years older—just a few years ahead…

Wrong place. Wrong time.

Timing Matters

Your planning and expectations for market performance should not just be a flat X%—12, 10, 8, or even 6.

It’s not that simple.

The amount of time you have before wanting (or needing) the money to achieve your goal will have a huge impact on what you should (historically) expect.

30-Year Horizon

It seems like most advisors and pundits and consequently people in general just take the 30-year average and run with it.

It definitely does make this all look way more compelling on the surface.

Even using real returns (explained in this post), a 1% management fee, and a 0.4% fund fee (those are both relatively low assumptions based on the industry averages, see their linked out posts respectively)—with those assumptions, the S&P 500 has averaged 9.6% per year across all 30-year periods since 1926.

That’s fantastic! Right?

It is. 

Of course, we’re talking about an average here, so… flip a coin: you might end up above that number, you might end up below.

But even then, the historical range from best 30-year period (12.2% per year) to worst 30-year period (7.0% per year) is not very wide. 

Conclusion: if you have a 30-year time horizon (so, if you’re in your 30’s or younger—good for you for taking this so seriously, by the way!) AND you entirely disregard our debunking of the myth that “the market will always continue to go up”—coming soon on this blog—then sure, assuming a conservative-9% average annualized return and preparing for the ‘worst-case’ possibility of 7% would be perfectly reasonable… the beginning of your planning years.

But, as you approach that retirement (or whatever other) goal of yours, wouldn’t it make more sense to consider a more relevant time frame?

Do the 30-year numbers really apply to you any more?

20-, 15-, & 10-Year Horizons

When you’re 20 years out from that goal, your ‘worst-case,’ historically-based possibility is no longer 7%.

Far from it, in fact. 

The lowest average annual return the market has ever realized over any 20-year period since 1926 was a bleak 1.7%.

That’s the difference between $100,000 growing to a mere $140,000 after 20 years instead of the $390,000 your forecasted ‘worst-case’ scenario would have been (under that previous 7% assumption).

Over any 15-year period, it was an average loss of 0.8% per year. 

10-year period, -2.8% per year.

5-Year Horizon

But, what if you’re just 5 years away from your target age?

This is where so many receive poor advice.

Because advisors are talking to their clients about making their money work for them during retirement—about allowing it to grow in the market so that it can support them during the next 20 or 30 years while they’ll be out of work—they’re still focused on that 30-year average return figure. 

This is what I discovered with all those clients who had been preparing for retirement within a few years of the Great Recession.

They had to delay their plans due to what their previous advisors had called “unforeseeable events”—the ominous black swan.

Except, it wasn’t unforeseeable…

In fact, historically speaking, the 5-year (2003-08) average annual loss due to that crash (-3.8%) was a fraction of what it’s been before.

For instance, the worst 5-year average annual return for the market was a 13.7% loss!

That’s per year...

...for 5 years!

Feeling Lucky?

Sure, that kind of loss is not common, nor should it be expected. But, it was far from “unforeseeable.”

In fact, 15 of the 89 5-year periods since 1926 have yielded negative average annual returns.

That’s 16.9% of the time.

For context, you have a 16.7% chance of rolling a 1 on a 6-sided die.

But, this isn’t a die you’d be rolling only once every 5 years. You’d be rolling it every single year.

Think about it for a moment...

If that’s how it was, would you treat your investments differently?

If the roll of a single die at the end of every year is what determined whether your average annual return over the previous 5 years was negative (anywhere between -13.7% to -0.9%, historically speaking, of course...), would you play the same way when you're 60 as when you’re 20?

I get it. It may feel as though...

  • You don’t have any other option. (You do…)
  • That this is the only way to really build wealth. (It’s not…)
  • That these are PRETTY good odds anyway.
  • That you just have to cross your fingers and hope one of those negative spells doesn't hit right before you are about to start your retirement. 

All of those thoughts are rooted in financial-industry myth. We’ll tear them down for you here soon enough.

The best way for you to ensure you get that valuable information the moment it’s available is subscribe to our YouTube channel and make sure you have your notifications on.

Post-Retirement Horizons

One final thought down this train of ever-shorter time horizons…

When you’re in retirement, it can be even worse.

If the market is down 50%, what are you supposed to do?

For every one year that you maintain your current standard of living, you’ll be shaving two years off your retirement projections (because you’ll need to sell twice as many shares of stock since they’re all worth half as much…). 

Historically speaking, there WILL be at least a couple of major crashes during your retirement.

(In a couple of weeks, we’ll explore exactly what this looks like—how planning for periods of withdrawals is even more complicated than these static figures we’ve been considering thus far. And, next week we’re exploring contribution periods and the unique challenge there—here’s a teaser for you: that 5-year ‘worst case’ scenario during times of regular contributions, actually drops to -24% per year! Insane right?! I’ll explain it all next time.)

But, back to the point here...

Not only is that fixed average annual return assumption not enough to best prepare you and your assets to achieve your goals, in retirement, relying upon it could be devastating.

Understanding the time-based potential of your market investments becomes essential for creating a plan in which you can be confident.

Just relying on the ‘experts’ “oh don’t worry, you should expect an average 8% [or whatever] over the long haul” is not practically helpful for you. It does, however, make their money management job much easier when their advice is just “don’t touch it...”

Don’t worry, we’re going to help you discover some better strategies... Stay Tuned! 

In the meantime, if you’d like more value from us, you should definitely check out our new, free, private community. I hope to see you in there…

Regardless, I wish you all the best.

Take care!

Stephen Spicer

Stephen Spicer, CFP®, AEP®, CLU® is the founder and managing director of Spicer Capital, LLC. He is married to his high school sweetheart, and they have three amazing boys.

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