From 1930 through 2009, an eight decade span, the S&P 500 Index produced annualized total returns of 9.4% per year.  It would be nice if that was a steady, reliable gain that you could count on each year, but the truth is much different.  Not only can you not count on it over one year, you can’t count on it for long periods of time!

Consider the annualized total returns of the S&P 500 Index by decade.
1930’s -0.1%
1940’s +9.2%
1950’s +19.4%
1960’s +7.8%
1970’s +5.9%
1980’s +17.6%
1990’s +18.2%
2000’s -1.0%

As you can see, there is a substantial amount of variability in returns over periods a decade and more.  Only one decade (1940’s) actually came close to the long-term average of 9.4%.  Three decades produced gains substantially higher (1950’s, 1980’s, 1990’s) while two decades actually produced losses (1930’s, 2000’s).

Clearly, the idea that you can just buy stocks, sit back, and capture the historical average return is not realistic.  Good luck may bring you many happy returns, but bad luck could leave you no better off than you were years ago.

At Modus Advisors, we don’t think you can reliably predict future returns on stocks and time when to be in or out of the market.  We don’t want our clients to miss out when returns are high, but we also don’t want our clients to be impoverished when returns our low.  Our approach is to try to smooth out the potential returns over time by using an “absolute return” approach.  The goal is to produce positive returns in different economic environments, whether stocks are doing well or not.  While this reduces the likelihood that an investor will achieve outsized gains like those in the 80’s and 90’s, we believe it greatly reduces the chance of suffering a “lost decade” like the 30’s or 90’s.

Check out Part 2 of our video, “Rethink Investment Risk”, for insight on how to approach the challenge of uneven investment returns.

Then see our special report, The Tremble Factor™, and find out whether a change in portfolio design is in order for you.
 

* Past performance is not a guarantee of future results.
* The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.   It is not possible to invest directly in an index.
* Investing in stocks is subject to fluctuation such that, upon sale, shares may be worth more or less than the original cost.
* There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio.  Diversification does not ensure against market risk.