The 10% Lie
OK, maybe “lie” is a strong word. A more genteel label is “mischaracterization of the facts”. Financial advisers have a nasty habit of telling clients that stocks go up 8-10% per year. This is harmful. It creates the wrong expectations.
The reality is that stock returns are far more volatile than that. A few years ago, I examined the returns of the S&P 500 over the 25-year period between 1990 and 2015. What I learned surprised me. Stocks rarely generated returns between 8-10% over any particular 12-month period. They were just as likely to fall 18% or leap 33% over the course of a year.
If you own stocks, do not expect 8-10% per year. Stocks are volatile. They go up a lot some years; they go down a lot some years.
Forget the idea of “safe haven” stocks. High-dividend and low-volatility stocks declined roughly in line with the S&P 500's ~8% decline between late January and early February.*
And it wasn’t just stocks that went down a few weeks ago. Everything went down. Even bonds (-1%). Even commodities (-5%). Even gold (-2%). So much for diversification.**
When things get bumpy like this, it’s important to know what you own and why you own it. Are you too heavy in stocks? Or too heavy in bonds? Or maybe too heavy in the wrong kind of stocks or bonds? Better to get these questions answered now while the waters are mostly calm. It’s much harder to make rational decisions amidst choppy water. Let us know if we can help.
Yours in the Field,
Frank Byrd, CFA
*Between Jan 26th and Feb 8th, the SPY, SPLV and NOBL declined by -7.6%, -7.3%, and -8.3% respectively.
**Between Jan 26th and Feb 8th, AGG, GSG, and GLD declined by 1.1%, 5.1%, and 1.5% respectively.
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