INDEX FUNDS AND STOCK MARKET RETURNS

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.

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

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

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

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

S&P 500	16.9%	-35.7%	9.5%
NASDAQ	20.8%	-45.4%	11.5%
NASDAQ-100	23.1%	-45.4%	13.5%
MY SYSTEM	20.1%	-11.0%	15.8%

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

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.

Meeting

Stay Disciplined My Friends,

Phil

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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.