Bulls Buy Stocks, As Fed Starts Talk Of Taper

Such is why understanding where you are in the current cycle is so crucial to long-term outcomes. Crashes matter and they matter a lot.

The next crash will be caused by the Fed once again. The only question is when.

It Matters When You Start

My colleague, CEO of Armor ETF’s, emailed me recently a vital point.

“There are two critical points that investors fail to understand: 1) it matters when you start and 2) losses matter because they take time to recoup the loss.

When it comes to investing, time can be your biggest enemy or your biggest beneficiary depending upon where you are (i.e. 20-year-old beginning investing journey vs. 60-year-old looking to retire in the next 5-10 years).” – Jim Colquitt

The chart below shows forward 10-year total forward returns versus starting equity allocation levels. The returns (CAGR) for the next 10-years should be around 0% (note the r-squared).

He is correct.

Let me explain. (The following is an excerpt from an upcoming article.)

Crashes Matter

Financial advisors regularly tell clients that since the market grew 6% annually since 1900. Therefore, that is what returns will be in the future. The chart below shows $100,000 invested at 6% annually from 2000 or 2007.

Unfortunately, it didn’t work out that way. 

During the past 20-years, the annual return for stocks has been just 4.96% annualized. Since the peak of 2007, returns have annualized roughly 8.14%. Over the next decade, current valuations suggest average returns will return to 2% or less.

For boomers who start in 2000, whose financial plans assume high return rates to offset a savings shortfall, they are now well short of their retirement goals. For those who started in 2007 they finally got back on track this year. The question is can they keep it?

Unfortunately, investment returns are far worse, as a vast majority of the fully invested individuals in 2007 sold out of the market by the end of 2008. It took years before they returned to the market. As such, actual returns are vastly different than what the index suggests.

Here is the sequence of events by age:

  1. 30’s: In 1980, the “baby boomer” generation is working, saving, and investing during the ’80-’90s bull market.
  2. 50’s: From 2000 to 2002, the “Dot.Com” crash cuts investments by 50%.
  3. 53-57: From 2003-2007, the market grows savings back to breakeven.
  4. 57-58:  The 2008 “Financial Crisis” wipes out 100% of the gains of the previous bull market and resets savings values back to 1995 levels.
  5. 58-63: From 2009-2013, financial markets rose, growing savings back to levels seen in 2000.
  6. 63-71: In 2021, investors finally made some progress towards their retirement goals.

Today, for most individuals heading into retirement, the importance of “mean-reverting events” should not be dismissed.

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