Keeping Stock Market Returns in Perspective

By Kevin Chambers

Based on the 5-year trailing return, the S&P 500 has posted a 14.7% increase[1]. Since 2000, only three 5-year periods ending in August have outperformed this period: the periods ending in 2000, 2014, 2015. Yes, of the top five performing 5-year annualized returns since 2000, 3 of them are the last three years. This indicates that the S&P 500 has been growing at a historical clip the last 7 years, reaching all-time highs this past month.

These top performing S&P 500 years are the times when diversification doesn’t work as well. Beating the S&P is basically impossible when it is on a roll. However, if you look at a 50% stock and 50% bond portfolio, in every other 5-year trailing period except for the top S&P performance periods, it is either just under the stock returns, or beats it.

It is always good news for investors when the stock market is doing well, even for those investors with diversified portfolios. What is important to remember, however, is to not get lost in the moment and chase stock market returns. The stock market is great when times are good, but that can change quickly. The stock market lost 9% in 2000, 12% in 2001, and 22% in 2002, after a huge 5 year run up. Looking at the 5-year trailing returns from 2003 until 2006, a 50% - 50% portfolio was a better investment. Keeping perspective is a good idea, especially because history has shown that switching your portfolio to all stock at this point might not turn out in your favor in the long run.

Headwater Investments remains committed to creating globally diversified investment portfolios for our clients. We ride the markets through ups and downs and incorporate strategies aimed to protect our client’s assets on downturns. We believe that with bigger returns, come additional and unnecessary risk. Thus, we never attempt to replicate the returns of the stock market.

[1] Source: Morningstar; from 9/1/2011 to 8/31/2016