The S&P 500’s Long-Term Return Is Mediocre…Really

That could destroy 60/40 portfolios in the years ahead

My biggest pet peeve as a professional investor is watching “urban investment legends” develop over time, flourish, and then wreck the wealth of people who are lulled into complacency by them. One such legend is that the S&P 500 Index always produces excellent long-term returns. By extension, investment pros and media suggest that you put most of your money into un-hedged equity investments, with a lesser piece in bonds and cash, just to “balance” things somewhat. I think this is the great advice…for the advisor, not for the client. Yet 60/40 portfolios, index funds and the like are now dominant portions of investors’ long-term portfolios. 

As with anything in investing, this might work out. But I don’t think it will. And there are 2 reasons for that. First, the bond portion of the plan is fraught with risks we have not seen in nearly 40 years, thanks to a bond bear market that is now over 2 years old. Second, the S&P 500 Index has just shown that when you truly look over longer time periods…20 years, let’s say… the impact of the occasional but inevitable bear market crushes your expectations. And all of this assumes that you don’t ding your return with emotional decisions along the way.

What do you think is the annualized return of the S&P 500 (including dividends) over the past 20 years? 8% 10%? 15%? Try 4.5%. Really. Here’s the chart.

But that’s not the biggest urban investment legend in this chart. Take a look across the entire chart, which is 20-year rolling returns going back to the early 1970s…which means it covers every 20-year period for the U.S. stock market going back to a start date of around 1950. That is plenty of evidence from which to draw a conclusion. And what I see is that for the vast majority of this long time period, the 20-year annualized return was under 8%. And as for the current level of 4.5%? It is at the low end of normal, which I would define as between 4% and 8%.  That is certainly a decent return on your invested capital. But it is not anywhere near what many unsuspecting investors have built into their assumptions about their financial future. This is the complacency I referenced earlier. 

This distortion between real and fake news, so to speak, is primarily because today’s wealthiest investors remember the 1980s and 1990s, which were a period of nearly uninterrupted strong returns for stocks. Indeed, for most of the 1990s and last decade, the 20-year S&P 500 return was over 8%, and for a while it was way over that level. 

But today’s investment climate is different. We are 9 years into a bull market for this revered index, and even that has only lifted the 20-year return to 4.5%. That tells you that the preceding decade was a rough time. It also tells you to start thinking about how to reduce your risk of disappointment by thinking beyond the buy-and-hold index fund, particularly that which tracks the S&P 500. And when you combine this situation with the likelihood of suppressed bond returns in the years ahead, you can start to see why I believe strongly that a different approach to constructing and managing portfolios is so important to consider now.

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Comments provided are informational only, not individual investment advice or recommendations. Sungarden provides Advisory Services through Dynamic Wealth Advisors.