Predictably unpredictable and unpredictably predictable. This is the market in a nutshell.

The markets are predictably unpredictable because the market has a way of surprising the greatest number of people. Few people (nobody) saw the market returning 29% in 2019. I realize that’s a distant memory now, but it was still surprising, to say the least. Just as surely, nobody saw an economic shutdown caused by a global pandemic that resulted in the swiftest recession in stock market history. And maybe even more surprisingly, nobody predicted an almost immediate market recovery to follow.

The market has a way of surprising us on a regular basis. It is a long-term trendline up, punctuated by short-term and sometimes drastic, downturns.

We know this to be true and yet we continue to be surprised by it. The market is going to go through temporary downturns. On an intra-year average, the market falls about 15% each year and about 35% every four years. Those temporary periods can be paralyzing even when we know to expect these sorts of events. It is predictably unpredictable.

Yet, the market is also unpredictably predictable. We don’t know the path the market will take, but at least historically, we know the market has followed that trendline up and to the right.

Even if we look at two twenty-year periods that started with a flat initial decade, we can see that the market was remarkably resilient. Using the calculator, S&P 500 At Your Fingertips, from January 1968 through January 1988, the total return of the S&P 500, adjusted for inflation, was 2.85%. (Nominal return of 9.33%)

And from January 1999 through January 2019, the total return of the S&P 500, adjusted for inflation, was 3.46%. (Nominal return of 5.69%) -> Notice how the nominal return is much lower than above, but the real return is actually higher. This is why I tend to focus on real returns, not nominal returns.

The market is remarkably resilient in the long run. Or as I would say, unpredictably predictable. We don’t know the timing of it all, but it doesn’t mean we should lose faith when these short-term catastrophes begin to take hold of our emotions.

From where we stand right now, retirees now are starting to project ahead. Should we keep our market return expectations the same or should we back them off? What does that mean for your retirement?

I believe it is prudent to adjust your expectations. I am not saying returns in the future will be lower, but they might be. If they are, are you prepared? Do you need to work a little longer? Have you saved enough? If you choose to take some chips off the table, does that squander your security in the long-run?

There are many questions to be asked. What if a COVID vaccine doesn’t come around within a year and the waves of economic shutdowns continue? What then?

With the markets getting close to pre-COVID levels, now is a great time to stress-test your retirement income plan. If you are financially prepared for those short-term uncertainties, you may be less apt to react as the news continues to develop and beyond.

Stay the Course,

Ashby

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This post is not advice. Please see additional disclaimers.