If you are like many of the people I know, you are VERY glad to see 2020 end and to turn the page to a new year. It is my wish for all my friends and clients that 2021 be a year where the best day of 2020 is the worst day of 2021.
I find it helpful to reflect on the BIG PICTURE in times like these. Humans often suffer from what behavior scientists call recency bias. This is the tendency to fixate on recent events and expect those events to continue. In recent years, we have had several examples of unusual events that really should not be expected to continue.
So, if you are saving for retirement, or any goal more than five years in the future, stocks remain the most reliable way to grow your money. In general, the purpose of investing is a few things:
- FIRST, take money off the table. This is the hardest part. When money is INVESTED it comes out of the monthly spending bucket and goes someplace else. The helps stop you from spending this money on something that is NOT important.
- SECOND, preserve spending power. Over time, things get more expensive. Think about what you paid for your FIRST house. And then think about what you paid for your LAST car. It might be that you paid more for your last car than your first house. That’s the power of inflation. An important goal of investment is to be sure the money you save today can buy the same basket of groceries in 40 years as it would today. So you want your money growing AT LEAST as fast as inflation.
- THIRD, grow your long-term spending power. Good investments, with five years or more to compound, can substantially increase the spending power of your savings. It can make a huge difference to your long-term success if you can consistently grow the money faster than inflation AND maybe fast enough to double a few times before you need to spend it. For example, the Rule of 72 says that if you grow an investment at a rate of six percent per year the money will double in 12 years.
So, what should you expect in the year ahead? Well, one thing I KNOW for sure is that I DO NOT KNOW what will happen next. But, all the experts I trust agree that with current government support levels, we should expect the next year to be relatively healthy for investments. But, what does that mean for your account?
Based on the projections of my financial planning software, an 80% stock and 20% bond portfolio is expected to return about 6.2% annual return over the next three to five years. This projection is based on historical analysis and projections calculated with consultant, Harold Evensky the “dean of financial planning.”
Here is what that 80-20 portfolio looks like.
Source: MoneyGuidePro financial planning software.
And you might find it helpful to remember a few historical facts:
- For the year 2020:
- S&P 500 index increase for the year was 16.3%.
- Total return of the S&P 500 index with dividends reinvested, for the year according to Barron’s was 18.4%.
- The lowest index level during 2020 was down 34% from the prior high.
- S&P 500 index since 1980:
- Average annual index return = 9% per year
- Average index total return with dividends compounded = 11.85%
- Positive returns in 31 of 41 years.
- Average intra-year decline = 14.3% each year.
- US inflation rate from 1913-2020 = 3.1% per year according to www.inflationdata.com.
The graph below illustrates the historical averages for the S&P 500 index since 1980.
So, the perspective I offer on the year ahead is:
- For long-term goals, stocks are a great tool.
- The value of stocks will go UP and DOWN each year. Don’t worry too much about changes on a monthly statement. Remember you own stocks for the longer run.
- Stocks are up in value for the calendar year three years out of four.
- We cannot predict EXACTLY what the next year holds for investment markets. Professional advice will help you prepare for the unexpected.
A great place to start looking for the right professional advice is to talk with a couple CERTIFIED FINANCIAL PLANNER™ professionals.
To find a CFP® professional near you, start your search here.
As you visit with financial planners, I suggest a couple things to check:
- Is the advisor always the client’s advocate – a fiduciary advisor?
- Is the advisor paid by clients, not financial product manufacturer or distribution network? That would be a fee-based advisor.
These two points help assure that you are working with a professional who is committed to your best interest at all times. It seems sort of obvious to me that a professional would work in this way, but it’s not automatic.
A fiduciary, fee-first, CFP® professional can help you make great retirement income choices and develop a comprehensive financial plan that is driven by your goals and priorities and addresses all aspects of your financial life. With a big-picture approach, you will be better prepared to understand your options at every step along the way.
Yes, I am a CFP® professional. I’m always a fiduciary and I work on a fee basis. And yes, I’m still taking on a few great families to be part of my financial planning practice.
If this article has you thinking about your own circumstances, contact my office at email@example.com. I am always happy to meet with people who are working on their retirement plans. Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.