‘Normal’ returns won’t feel good; embrace them anyway

September 3, 2021 by admin

The stock market has more than doubled since pandemic lows in March of 2020.

It appears to have learned how to deal with coronavirus better than people have, shaking off every bit of bad news to stay positive and keep rolling despite real concerns. Even as hospitalizations and deaths related to Covid-19 have been climbing – and as many businesses have suffered from supply-chain and staffing shortages – the Standard & Poor’s 500 has kept on rising.

It’s up more than 20 percent this year, and has already closed at record highs this year more than 50 times; even if it retreats from here, 2021 will be the first time in over 50 years with more than 50 record highs.

But even if you buy into the idea that economic forces can push the market higher from here, framing expectations is important, because after such big gains so quickly, it will be easy to be disappointed with less, and a slower, steadier climb is a fair expectation of what the market is likely to deliver next.

“Mathematically, it’s going to be very hard for the equity market to double again, like it has in the last year,” said Stephen Dover, chief market strategist at Franklin Templeton, and the head of the Franklin Templeton Investment Institute, in an interview on “Money Life with Chuck Jaffe.” “In order to do that – presuming that earnings growth hits an average of around 6 percent over the next few years – it’s going to take another eight or so years before the market can double.”

Mind you, if the market doubles in the next eight years, it means that the average annualized return would be 9 percent, right around but slightly below the market’s long-term average.

That’s not bad, and yet it has the potential to feel horrible, because it’s so far off both the last year and year-to-date numbers, and it badly lags seven of the last 10 calendar years.

Thus, savers should get their investing emotions in check now, because what lies ahead isn’t likely to be disappointing, but it may feel that way.

Investors have a problem with “recency bias,” the tendency to over-emphasize experiences and events that are freshest in their minds. There is an expectation that what happened recently will continue into the future.

The problem with that tendency is that the recent past tends to be a poor indicator of what’s about to happen.

In February and March of 2020, for example, the stock market was tanking and investors were freaking out, as evidenced by the $1 trillion-plus that flowed into money funds even though those funds were delivering near-zero returns.

The expectation was that the pain would continue, but it turned out nothing could be further from the truth, as the subsequent rebound has shown.

The money that moved out of equities to avoid the anticipated market pain instead was subjected to the anguish of missing out on the rebound.

While a majority of market observers currently are calling for any upcoming market downturns to be even more transitory than inflation – meaning that dips and dives are really buying opportunities – they’re not necessarily expecting the market to go gangbusters.

Individual investors in times like these are in danger of taking their eye off the ball, which in this case represents their own portfolio and their own unique needs.

It is reminiscent of how investors deal with financial advisers.

Typically, individuals in need of financial help are looking to develop a plan that takes into account what they own, what they earn, where they are financially and in life, and where they want to go.

While they are looking for guidance in how to invest, what they need more is expertise in planning and developing the emotional discipline to follow a blueprint to the end.

Those good intentions, however, get short-circuited the moment there are performance issues, as the very same people who didn’t mention returns as a reason for hiring adviser use disappointing short-term results as their excuse for firing one.

Anyone with a “what have you done for me lately?” mindset could be disappointed if the next 12 months deliver single-digit returns compared to the doubling of the last year.

To set expectations properly, look first at the returns you need from your portfolio, the benchmark return you are hoping to achieve.

With adequate savings, most individuals can reach their goals if the stock market delivers its historic long-term norms of between 8 and 10 percent.

Everything else is surplus to be stockpiled for protection against those times when the market underachieves. Excess returns are a bonus, not a guarantee.

And while you might think that investors are savvy enough to avoid over-reacting to the market’s run, consider the situation akin to the way stocks are moving on economic news these days.

The market has been driven in large part by giddy economic growth numbers, results which are artificially inflated when compared to last year because the pandemic had brought the economy to a standstill.

A year from now, some solid economic numbers are likely to look pedestrian compared to the bloated results of today. If those comparisons convince investors that trouble is coming, they might be faked out as to what is really happening.

Enjoy the heady returns the market is delivering now, the seemingly continuous run of new record highs and the personal landmarks that your account balance has been crossing over the last 12 months, but be realistic.

What we are seeing today won’t last; good times – and bad times – don’t have an open-ended run on Wall Street. The show always closes.

In time, returns will “normalize.” Savvy, long-term savers need to accept and embrace normal – rather than frustrated by it — because it is their path to financial success.

#-#-#

Chuck Jaffe is a nationally syndicated financial columnist and the host of “Money Life with Chuck Jaffe.” You can reach him at itschuckjaffe@gmail.com and tune in at moneylifeshow.com.