by Robert Cucchiaro
Recently a client who was going through a divorce asked me what the S&P 500’s annual rate of return had been over the past 25 years. She was astonished to learn that it was over 9% per year. This was pertinent to her divorce because the attorney for her ex-husband was suggesting that his pre-marital assets should be assumed to have grown by that rate. This of course would mean more money for him and less for her.
I offered to jump in and speak with both her ex and his attorney and ultimately convinced them both that most stock investors don’t actually earn stock market returns, and there are plenty of studies done that back this up. Convincing them to use a lower assumed rate of return on pre-marital assets meant more money in her pocket and less in his, but even he admitted my logic was correct.
Here is a quick summary of why I made that statement about investor returns. Let’s say on Jan 1st 2000 you had suddenly inherited $1,000,000 and plunked 100% of it into the Vanguard S&P 500 index fund (ticker symbol VFINX). 1 year later your $1M investment was down to $909,000. Two years later that # had dropped to $800K, and 3 years later that number was down to $623K, a 38% decline from where you had started.
It wasn’t until 4 full years later (2006) that you got back to breakeven on your investment, where your $1M investment would have finally grown to $1.078M. By the end of 2007 your account would have grown to $1.136M and at that point, your average annualized return would have been less than 2%.
At this point if you are like most people you would surely be questioning the brilliance of this investment. And this is heading into 2008, a year in which the S&P 500 dropped by 37%! By the end of 2008 your $1M initial investment would have fallen to $715K.
Now, if you had stuck with this investment by the end of 2015 your initial $1M investment would have grown to $1.866M, an increase of 87%. And over the last 10 years your average annual returns would have been 7.18% before taxes. But needless to say it would have been a bumpy ride and most people would not have stuck with it.
This is the reason most investors should not have 100% of their money in the S&P 500 index, because even though the long term returns are hard to beat, most people don’t actually receive those rates of return.
Being a good investor starts with knowing yourself and knowing how much volatility you can really stomach before you would bail out on your long-term plan and sell assets at a loss. A good financial advisor will help you discover the answer to this question before investing your money.
Investing is not easy but with some professional help, you can grow your assets over time and increase your net worth.
As always, we are here to help and always offer an initial consultation at no charge.
Robert Cucchiaro is a Certified Financial Planner and a registered tax preparer. He is a Partner and owner of Summit Wealth & Retirement, a financial planning firm that has been serving Danville for 30 years. Rob specializes in retirement, investment, tax, and estate planning. www.summitwealthandretirement.com