It’s not uncommon for new clients to ask me how I think the market will perform. I guess some people expect their financial advisers to have a unique ability to predict the future. Many advisers will actually offer their opinion about how they believe the stock market will perform in the near future, either because they feel like the client expects them to know or, worse yet, because they actually believe their guess about the future is somehow correlated to what will actually happen.
In my opinion, the best advisers understand that they are not omniscient and therefore they need to create a plan that will result in a favorable outcome for their clients regardless of the sequence of market returns. Throughout history, the stock market has rotated between long periods of prosperity and long periods of stagnation. Since the S&P 500 originated in 1928, stocks averaged about 10 percent per year.* The last bad stock market occurred from 2000 to 2010. The S&P 500 actually ended at a lower price than it started 10 years earlier. Similarly, between 1966 and 1982, the stock market barely appreciated at all. However between 1983 and 2000, the Dow Jones increased tenfold.**
We know that over very long periods of time (20 to 30 years) stocks will generally do very well. Unfortunately, most retirees don’t have a 30-year time horizon. In fact, as I just alluded to, there are frequently decades when stocks lose real value. How would it affect your financial security if the next 10 years turns out to be another lost decade?
While it’s entirely appropriate for most retirees to have some allocation to stocks, they may want to consider diversifying into other asset classes such as real estate, alternative investments and annuities that can either appreciate or produce income even during decades in which stocks are performing poorly.
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