By Stuart Ritter on June 30, 2009
As of December 31, 2008, the Standard & Poor’s 500 Stock Index (S&P 500) had lost 37% over the previous one-year, a number that has received a lot of attention. Because -37% is the lowest calendar year return in the last 50 years, the attention is warranted. At the same time, that return may be distracting investors from a number that could be even more important to them.
Let’s start with a question: What is an appropriate time period over which to evaluate the performance of the stock market? Is it three months? One year? Five years? Ten years? Or another time frame?
Let’s start with what’s not appropriate: If you are going to spend all of your money one year from now the percentage of your portfolio in stocks should be zero—so a one-year return for the stock market shouldn’t affect you.*
A more appropriate time period is 15 years since, if you look at the S&P 500’s performance from 1926 through the end of 2007, it never had a negative return over any of the rolling 15-calendar year periods. And despite the one-year return of -37% for calendar year 2008, the S&P 500 had a positive 6.5% average annualized return for the 15-year period ended December 31, 2008.
In live presentations, when I ask, “Who would like to have earned an average 6.5% return over the last 15 years?” pretty much every hand goes up. And my point is, that’s what you have! If you were invested 100% in the S&P 500 for the last 15 years, you’ve earned an average annualized return of 6.5% per year. Of course, past performance cannot guarantee future results.
So, if you’re investing in the stock market, while a one-year return may get your attention, a longer-term record is the better assessment.
*Note that, with retirement savings, you should not spend all your money the first year. If you are one year from retirement (e.g., age 64), you still need to plan for a retirement that could last 30 years.
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