Updated: Aug 26
Most people intuitively understand the highs and lows of stock market investing, but when you assemble the data on stock market performance, the results can be startling.
Many of you know that I am a big fan of the best large-cap U.S. stock index funds. Let’s take another look at why I—and many other investment strategists—prefer these funds.
AVERAGE ANNUAL RETURNS
LAST 10 YRS.
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S&P 500 | 15.3% |
NASDAQ | 18.4% |
NASDAQ-100 | 20.3% |
What’s not to like about returns like these? Over the long term, nothing beats them.
However, it’s important to recognize that the last decade was an extraordinarily strong period for stocks. We experienced an extended bull market with only one minor bear market.
So none of us should expect the next 20 or 30 years to look like the last 10. The longer-term averages—going back 50 years—provide a more reasonable expectation for the future. Here are my normalized assumptions going forward.
AVERAGE ANNUAL RETURNS
LAST 10 YRS. PROJECTED
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S&P 500 | 15.3% | 9.5% |
NASDAQ | 18.4% | 11.5% |
NASDAQ-100 | 20.3% | 13.5% |
These expectations are still excellent long-term growth rates—the kind that can build substantial wealth with enough time to compound.
To reinforce my belief in U.S. large-cap index funds, let’s compare them to other common investments that are probably already in your portfolio.
AVERAGE ANNUAL RETURNS
LAST 10 YRS. PROJECTED
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INTERNATIONAL FUND | 7.7% | 6.0% |
US SMALL CAP FUND | 9.0% | 8.0% |
INTERM BOND FUND | 2.2% | 3.0% |
60/40 PORTFOLIO | 8.4% | 6.5% |
Except for bonds, none of these other options are necessarily “bad”—they’re just nowhere near as strong as the S&P 500 or the Nasdaq.
Advisors and the investment industry push investors into these other funds to smooth out portfolio “volatility.” But the truth is that every one of these categories can lose significant money during major bear markets… even bonds.
This volatility—and the occasional bear market—is exactly why investing feels difficult. Smoothing out returns isn’t a real solution. It simply means accepting lower returns and slower portfolio growth.
Some investors still believe they can outperform the market by picking individual stocks. The temptation is understandable—who doesn’t want to catch the next Nvidia?
Unfortunately, the performance data on stock pickers is overwhelmingly poor. A tiny handful of professionals (mainly hedge fund managers) can outperform major indexes over long periods. But 99.8% of stock pickers fail to even match the S&P 500 over 20-year periods.
Many get lucky for 6–18 months, but those gains often disappear later.
Individual-stock portfolios also experience even greater downside volatility. If you enjoy the thrill, I recommend limiting stock-picking “fun money” to no more than 5% of your total portfolio.
Now let’s look at how volatility affects my favorite U.S. large-cap index funds.
It would be wonderful if these excellent returns arrived at a steady pace, but that’s not how markets work. During strong growth cycles, annual returns often come in around 20%—far above long-term averages. These gains are offset by dramatic losses during bear markets.
AVERAGE ANNUAL RETURNS
GROWTH CYCLE BEAR DECLINE AVERAGE
86% of time 14% of time
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S&P 500 | 16.9% | -35.7% | 9.5% |
NASDAQ | 20.8% | -45.4% | 11.5% |
NASDAQ-100 | 23.1% | -45.4% | 13.5% |
A pie chart makes this even clearer. Using the Nasdaq-100 as an example:
- 86% of the time the Nasdaq is rising at an annualized rate of 23%
- 14% of the time it is dropping at an annualized rate of negative 45%
This is the reality of stock market investing: many strong years, punctuated by a steep decline roughly every six years. Thankfully, markets are in growth mode most of the time.
Despite this reality, the investment industry insists that investors use the same strategy regardless of market conditions—the classic “Buy & Hold & Suffer” approach.
I never thought this made sense. And because the industry offers no effective solution, I created one.
My Growth & Safety strategy isn’t perfect, but it works far better than anything offered by traditional investment services. Here’s how it navigates volatility:
AVERAGE ANNUAL RETURNS
GROWTH CYCLE BEAR DECLINE AVERAGE
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S&P 500 | 16.9% | -35.7% | 9.5% |
NASDAQ | 20.8% | -45.4% | 11.5% |
NASDAQ-100 | 23.1% | -45.4% | 13.5%
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MY SYSTEM | 16.0% | -12.0% | 12.0% |
My system can’t avoid all losses during market collapses—but it loses far less. Just as importantly, it captures most of the large gains during growth cycles.
Now compare this to how most retirees are invested. The majority are placed in some version of the classic 60/40 stock and bond portfolio because they’re told to “be conservative” after age 60.
AVERAGE ANNUAL RETURNS
GROWTH CYCLE BEAR DECLINE AVERAGE
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MY SYSTEM | 20.1% | -11.0% | 15.8% |
60/40 STRATEGY | 10.5% | -17.9% | 6.5% |
As a result, most retirees earn about 6.5% per year. They experience roughly half the gains during growth cycles (about 10.5% vs. 21% for the index funds) and half the losses in bear markets (about –17.9% vs. about -40% for the index funds).
This is exactly why I designed a smarter way to invest.
I wasn’t comfortable losing nearly 18% per year in bad markets with the so-called “safe” strategy. I also didn’t want to miss out on the powerful gains available during bull markets.
I prefer earning close to 20% per year in good times and losing only around 11% during the rare downturns.
You can have Growth & Safety in your retirement investments. Older investors need growth to keep pace with inflation—and they simply can’t afford devastating losses in deep bear markets.
If you want to rescue your retirement immediately, schedule a call using the link below. I’ll show you how you can start using my investment system directly through your brokerage account.
Stay Disciplined My Friends,
Phil
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
After a steady climb higher, stocks have declined over the last few weeks. The Nasdaq has declined about 4% and the S&P 500 has declined about 3%.
In the chart below you can see the significant gains since the low point in April following Liberation Day and the slight decline over the last few weeks.
On a year-to-date basis, the S&P 500 is up about 14% and the Nasdaq is up about 18% (not including dividends).
The recent pullback is being driven by a few things:
Anxiety over a potential AI bubble
Anxiety over the next Fed moves on interest rates
A big increase in interest rates in Japan
AI’s impact on the stock market is extremely volatile of late. One day the AI excitement drives the market higher and the next day AI fears drive the market lower.
We are still not receiving timely inflation or jobs data due to the government shutdown. The most recent jobs report was decent even though unemployment ticked up to 4.4%. All eyes will be on the next inflation update which will determine the Fed’s position on interest rates. At this point, it looks like even odds on whether the Fed cuts rates by another quarter of a percent or whether they hold steady.
Many stock market analysts believe that the low interest rates in Japan over the last decade have been a catalyst behind the long and powerful bull market of the last ten years. With rates rising in Japan, this source of cheap money will dry up and no longer be available to drive US stock prices higher.
My valuation gauge indicates that the stock market (S&P 500) is now about 24% above its fair market value in late November. At the beginning of November this guage was at 27% over fair market value. Both readings (+24% currently and +27% at the beginning of the month) are a cause for some concern.
I do not trade based on market valuation levels and you should not either. It is just a reminder that you need a strategy in place to protect your savings in case we experience a bear market. Older investors in particular need loss protection.
My investing system comes with built-in loss protection. It is designed to avoid most of the losses in bear market meltdowns. But it also produces big gains in bull markets. You can now invest in my system directly from your brokerage account. Click on this link to get on my calendar to learn how to start using my smarter way to invest.
Stay Disciplined My Friends,
Phil
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
There is a question on many minds today: Is the AI bubble finally starting to pop? After years of exponential hype, skyrocketing investment, and aggressive infrastructure build-outs, a growing chorus of tech leaders, economists, and market watchers are questioning whether the current AI boom is sustainable. And if it is popping, what does that mean for the stock market?
Below are a few things that have people concerned.
META Capital Expenditures
META recently announced a major increase in AI-related capital spending — and the stock market did not like the news. The stock dropped roughly 20% in response.
Many investors took this as a sign that the market is skeptical about the return on those investments.
The big AI players will invest nearly $400 billion this year alone. The good news is that these companies have the cash flow to fund it. Smaller companies and startups, however, do not have the financial strength to weather AI ROI disappointments.
ROI Concerns
A recent MIT study suggested that 95% of AI pilot programs are not yet showing measurable benefits. If business results from AI don’t materialize in a meaningful way, a major correction in the AI sector could follow.
That being said, the MIT findings don’t entirely align with many reports of AI-driven job cuts and real productivity gains. I’ve seen studies showing that software developers can increase productivity by several hundred percent when paired with an AI coding agent. Companies are regularly announcing job cuts due to AI productivity improvements.
It is also very likely too early to fully measure the long-term business impact of AI. These systems are still in the early stages of real-world deployment.
Valuations
Valuations for many new AI companies do look aggressive. Some AI startups have annual revenues under $10 million but market valuations above $10 billion. Some will grow into those valuations — many will not. This dynamic isn’t unusual with emerging technologies.
However, the valuations of the established AI leaders are supported by strong revenue and profit growth. Microsoft, for example, trades at a price-to-earnings ratio of about 35. Given its profitability and growth trajectory, that valuation isn’t unreasonable.
The Future
As we move further into the AI era, we should expect volatility. Smaller and newer AI companies are likely to experience dramatic stock price swings. Even so, I do not expect startup failures to significantly impact the broader stock market.
If AI returns fail to materialize for the major players — the “Mag 7” — the impact will be larger, but still manageable. These companies have strong balance sheets and generate massive profits from other parts of their operations.
This is why I do not expect anything resembling the dot-com collapse of 2000–2001. Back then, tech stocks fell more than 75%. Companies were overvalued by 60% or more, and many early dot-com businesses had no profits and flawed business models.
Today, stocks appear overvalued by roughly 20%, and I do not see major credit risks forming around AI investments.
If significant AI disappointments emerge, stocks could easily fall 30%. But a 30% decline is actually a below-average bear market — declines of 25% to 30% happen regularly.
Over the past week, the stock market has fallen about 4% to 5%. It’s too early to tell whether this is the start of a major decline or simply a normal correction. Major declines don’t happen overnight; the dot-com crash unfolded over more than two years. The average bear market plays out over roughly 11 months.
Regardless of what triggers the next market downturn — AI-related or otherwise — retirement investors need a strategy that protects their savings from major losses.
My investing system is designed to do exactly that. Reach out if you’d like to immediately get the peace-of-mind that comes with a high growth investing system that limits losses in downturns.
Stay Disciplined My Friends,
Phil
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
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