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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.
Over the long term, confusing market crashes and bear markets can be detrimental to investor outcomes. Yet, this is what Morningstar did recently in discussing the market correction in 2020. To wit:
“The market downturn caused by the COVID-19 pandemic was one of the most severe in recent history, but it also proved to be one of the fastest recoveries. This episode reinforces two important lessons for long-term investors:
Don’t panic and sell stocks when the market crashes.
It’s very hard to predict how long the stock market recovery will take.”
During the downturn, I made these points in an article about the history of market crashes. I showed that the 150-year record of U.S. market returns is littered with bear markets (downturns of 20% or more) and in each case, the market eventually recovered and then went on to new heights.”