Financial Friday Feature on The Morning Buzz with Cat
By: Kevin C. Kingston, CLU
Chartered Financial Consultant
Managing Director and Financial Advisor
Savant Wealth Management, savantwealth.com
INVESTING IN THE EQUITY MARKETS
Although negative stock market returns occur, the number of years that the Equity Markets (Stocks) have posted positive returns outweigh the years of negative returns. The Standard and Poor’s 500 Index (S&P 500) is a market capitalization weighted index of 500 leading, publicly traded, U.S. companies and is often referenced as a measure of Equity market return performance.
It is widely considered the best gauge of performance of U.S. large-cap stocks. While the Dow Jones Industrial Average (DJIA) has often been associated with equity performance from a retail investor’s perspective, it only represents 30 companies. Therefore, the S&P 500 is considered as more representative of U.S. market performance.
Historical Returns
Market corrections frequently occur, meaning that the market went down more than 10% from a previous high price level. This can happen anytime during the year and the market usually corrects during the year, not ending the calendar year with a negative return. A bear market occurs when the market is down over 20% from it’s previous high for at least two months. Historically, bear markets on average have lasted about 12 months.
The Great Depression and the 2007 Financial Crisis, led to two of the largest equity market declines in history. Our minds recalling negative years more vividly than positive years, you may be surprised to learn, the S&P 500 Index as a gauge of performance, from 1980 through 2021, only experienced seven years of negative returns.
Thirty-four years of positive returns versus seven of negative returns, since 1980. During that time, there were fifteen years when the annual return exceeded 20% and most of the time that followed a year of negative return.
Reasons To Stay Invested
Becoming a composite index tracking 90 stocks in 1926, the S&P 500 assumed it’s present size and name in 1957 producing a negative return of 11% that year.
The following year, 1958, it was positive 43% for the year.
From 1957 through Dec. 31, 2021, the S&P annualized return was 10.67%.
The ten-year annualized return of the S&P 500 index as of Dec. 31, 2021, was over 12%. In 2020, the market entered a bear market in March but ended the year up approximately 18%. Even professional traders have difficulty predicting the beginning and end of corrections.
Investors who try to get in the market and then get out during a bad year will likely lock in a loss.
Investment Management
Investors with a longer-term outlook, may have greater returns by choosing an allocation strategy and staying with it, through favorable up and down markets. Professional advisors construct a diversified portfolio that provides risk adjusted returns matched to your objectives, determined through the financial planning process.
Your portfolio should provide broad asset allocation, using market index and mutual funds with exposure to equities and fixed income securities. Asset allocation, diversification and staying invested are the most important tools that investors can use to manage their risk and achieve financial objectives.
