Why The S&P 500’s Long-Term Performance Is So Confusing To Investors

By Rob Isbitts via Iris.xyz

The good times make us forget the bad times

Be positive. Think positive. Don’t focus on the negatives. Forget about it. These are all great pep talk lines.  But for investors in 2019 and beyond, they are a trap, and a good way to lose a small fortune…or a big one.  See the chart immediately below for precisely why this is the case.

Above you see the rolling 10-year return of the S&P 500 Index.  At the far right, you can see a spike in this figure, such that in the past couple of years, the trailing 10-year experience for an investor went from solid (around 6% a year) to over 11% a year. But now, the 10-year return is nearing its highest level in a long time, and it currently is at one of the highest levels since the 1960s. It is also right around the level at which it peaks and then declines. The message here: after a 10-year run like this, the S&P 500 is due for a rest, and more likely a period of weak returns. 

I have said this many different ways over the past year or so, but what is significant now is that the fourth quarter of 2018 finally reminded investors that the S&P 500 and the stock market in general is not a one-way trip (up).  Furthermore, the last thing an investor should do after a period of historically strong advances is assume that they will continue. But that is not how many investors think. Instead, they expect the good times to last…and I think it is because they can’t remember the bad times. If they did, they would be all-weather investors instead of expecting that it will never rain, or snow, or freeze.

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