September 24

Investments, Stock Market


Tens of millions of people’s stock portfolios realized an average annual loss of more than 6% during the decade that ended in 2008.

They were following traditional advice—doing everything they were told. And, still… -6.4% per year for 10 years! 

I’ll walk you through all the numbers and logic so that you can be better prepared as you plan for your long-term financial goals...



Over the last several posts, we’ve been on a quest to better understand the returns you should expect from your stock market investments. We went from the 12.1% simple historical average of the S&P 500 to the 10.2% geometric average. Then, we evaluated the true cost of advisor and fund fees—the industry averages there brought us down to a historically-based annualized 8.7% average return.

But, then in our last installment, we realized that it’s much more complicated than that. It’s very dependent upon your unique timeline...

If you’re only 5 years out from needing your funds, preparing for a more-than-10% per year loss would not be unreasonable—that’s happened multiple times in the past.

So, adjusting your custom financial plan based on your unique timeline really matters—it can be the difference between achieving the goals you’ve worked so hard for and… having to go back to work as a Walmart greeter just to make ends meet.

Unfortunately, it gets even more complicated...

The Last "But Wait There's More!"

When you’re not putting money into or pulling money out of your investment accounts, the order of returns doesn’t matter.

Put another way, if I reverse the order of every annual return since 1926 and apply it to our same $100 investment assumption that we’ve been revisiting throughout this series, we’ll still end up with the same $4.6MM (from the example in our earlier posts) 94 years later—even though the crash of 1929 would have just happened!

We would have the same simple average return of 12.1% and actual return of 10.2%.

But, how often is it the case that we’re not contributing to or pulling from our investment accounts? 

Sequence Risk

Before retirement, we are (presumably, or at least would like to be) contributing to our accounts every year.

During retirement, we are likely pulling from our accounts each year.

During these stretches of regular contributions or withdrawals, the order of those returns actually makes an enormous difference. This is called Sequence of Returns Risk or just Sequence Risk.

When adding this reality into your planning considerations (as we do with our clients), you discover that historically-based, time-period-specific highs could be even higher, and the lows... could be much lower.

Meaning that -13.7% annualized return for our historically-worst-ever 5-year period, could actually be even worse for an individual investor depending on the specific sequence of returns and whether they just so happened to be contributing or withdrawing.

Before we explore the now-even-more depressing ‘worst-case’ historically-based scenario, let’s evaluate a perfectly average 10-year period, 1974-1983 (for the time being, we’ll ignore the crazy inflation of that era). The real average annual return over this period was 9.1% (compared to the average for all 10-year periods of 8.9%). 


As we explore the impact that sequence risk has on your account during periods of contributions, (just at first) let’s leave out all the fee assumptions—let’s look at the bottom-line impact that this one simple factor can have on your success.

The simple average return of these 10 years is 12.4%. If you made a $5,000 contribution at the beginning of each year (for those 10 years) into an account that’s tracking the S&P 500, it would have grown to $110,000 (excluding fees) by the end of 1983. 

Bad Years First

What if we mixed up the order of those returns? What if all the worst years were first and the best years last?

With all the other assumptions the exact same as last time, your account would now grow to $151,000. That’s $41,000—37%—more over that same 10-year period with those same returns ...just in a different order.

That’s an effective 23.09% return.


That’s even better than the best 10-year period in the entire S&P 500’s recorded history (which was 18.4%, by the way).

How is that possible? How’d it go from a very plain vanilla ‘average’ return decade to better-than-the-best?

It’s because we put all our bad years first and good returns at the end. But, more importantly, the reason that even made a difference at all—let alone a massive one—is because you were making contributions

Good Years First

What happens if we put all the good years first and the bad ones last? I’m so glad you asked!

Now, at the end of that same 10-year period, your account balance would only be $60,000. That’s $50,000—or 45%—less than you would have gotten with those same returns in their historical order.

That would have dropped your actual return from 16.6% all the way down to 4.1%.

That means that, just because we were making contributions, the sequence of returns went from having absolutely no impact to having a massive one...

Depending on the order, our actual average return (excluding any fees) after 10 years could have been anywhere from 4% all the way to 23%!

That’s the difference of ending up with $60,000 or $151,000.

And, remember, these were the figures from a historically-average decade.

Takeaway: as long as you’re not contributing… you don’t have to worry about this phenomenon.

But, aren’t you contributing (or, at least, shouldn’t you be) to your investment accounts during more of your pre-retirement adulthood than you aren’t—especially, as you get closer and closer to retirement? 

If that’s the case, your historically-based expectations need to swing much wider than discussed in these previous videos, most importantly factoring for an even worse ‘worst case.’

Side note: It looks as though—counterintuitively—you don’t actually want your good return years first while you’re accumulating. I guess that means you should hope for massive losses in Year 1...

New 'Worst-Case'

As you’re approaching retirement, aren’t you (shouldn’t you be) more concerned about the possibility of your returns being worse than average?

Let’s evaluate that concept of the revised ‘worst case’ expectation given our newfound grasp of sequence risk during contribution periods.

The worst 10-year period in the market was from 1999 through 2008.

The simple average return was only 0.7% per year.

After fees and factoring for actual returns, you’re already looking at a figure that’s more than 3% worse than that.

When you factor in our same $5,000 contribution scenario from earlier, the geometric return would have been an annualized loss of 6.4%.

Sustaining an average annual 6.4% loss throughout the decade right before you plan to retire is devastating!

The Industry's Comforting Words...

When explaining away this lost decade (99-08), Dave Ramsey says...

“But that’s only part of the picture. In the 10-year period right before that (1990–1999) the S&P averaged 18% annually. Put the two decades together, and you get a respectable 8% average annual return.”

Imagine you’re a decade from when you’d like to retire. You design your plans based on that “respectable 8% average annual return.” Congrats, this is the home stretch. You can make it; you can do it. You just gotta stick to the plan.

But, aw… guess what?

Your accounts end up averaging negative 6.4% per year, leaving you far behind what you need to hit your goal.

How do you feel?

Is this just an ‘aw-shucks moment’ for you?

Where you whimsically think, “ah, I just got unlucky…”

Do you take comfort in Ramsey’s reminder that the previous decade yielded a return of roughly 18% per year? Not too shabby!

(I mean… that in no way affects your total now. You’re still far from your goal… but hey… can’t blame him—or the countless others touting this same wisdom—their math checks out!)

But really, so, what now?

Obviously, if you find yourself in this position, that math wouldn’t comfort you. You were 100% on track a decade ago. You were doing so well. You were just unlucky to hit that horrific 10-year stretch where you averaged less than -6% per year on your stocks. 

So, now what? Retire on less? Retire later?

That’s what most people do who (kind of left it up to chance and) find themselves in this position... 


The bottom line is: if you’re in your 50’s trying to intelligently get yourself into a position where you can retire—no matter what happens—this ‘hope-we-get-one-of-those-better-than-average-decades’ strategy would be imprudent and irresponsible. 

And, in that same vein, this “you should expect to average X% per year in the market” becomes meaningless noise. 

Yet, this is the advice advisors continue to give. They, too, hoping that the coming years bring solid returns. Because if they don’t—as they inevitably sometimes won’t—advisors lose clients. Frustrated after facing such a devastating reality, people fire their advisors and move on to the next one. Sadly, odds are, that new advisor was offering the exact same advice as the previous one a decade prior and continues to offer the same type of advice today… because that’s just how it’s done in the industry—by professionals, pundits, and academics alike.

I invite you, with all the content we’re putting out there now, to challenge that traditional investment paradigm.

Just, at least... leave yourself open to it...


Oxford defines gambling as “taking risky action in the hope of a desired result.” 

How is this different?

You’ve been sold the “desired result” not the potential reality. 

Stop gambling...

Stop “taking risky action in the hope of” hitting your financial goals.

Ultimately, as you’ve seen here thus far in this series (and will become even more convinced of in the series we have lined up for you next), that’s what the mainstream advice is pushing your toward: “risky action” and just “hope.”

And... don’t worry. We’ll get to some potential solutions, some better strategies...

One of the best ways to keep up with everything is to subscribe to our YouTube contentwe have a lot to cover as we challenge an entire industry

But, before we get to all that, we’re going to continue that comprehensive exploration of what kind of returns you should expect from the stock market. Because, we’re not done... when you start to enter retirement and we’re talking about planning withdrawals… this reality gets even worse (we'll explore that in detail in next week's post).

I hope to see you there. Until then, 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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