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  • Writer's pictureKyle Rolek, Retirement Planning Specialist

Historical Data Following Prior Bad Years for S&P 500 Index

First, this article shows what's previously occurred during prior bad years for the S&P 500 Index. The purpose of sharing this data first is to look ahead to what could potentially come next following what's shaping up to be a historically bad year for the S&P 500 index.

Next, it uses additional historical data to make a case for staying the course, particularly during bad years like now.

If the S&P 500 index closed the year at the current level (-25.2% as of 09.30.22), it would rank as the third worst year since the depression era of the 1930s. Only 2008 and 1974 (barely) were worse.

While the S&P 500 index is having a historically bad year:

  • The international stock index is fairing even worse. The index's return is -28.5% year-to-date as of 09.30.22. (based on Vanguard International Index Fund)

  • Bonds are having their worst year in history. The US total bond market index's return is -15.2% year-to-date as of 09.30.22. (based on Vanguard Total Market Bond Index Fund)

Depending on the allocation, this year has been worse for some retirement savers than the decline in 2008 because bond returns were strong in 2008 (around +8%) while bonds are having their worst year in history so far in 2022 as stated above.

While this has certainly been a painful year for retirement savers, in time, markets are very likely to eventually recover just as they have following prior significant downturns.

With that in mind, the data below shows historical returns following the 11 prior worst years for the S&P 500 index.

Here are key points:

  • In the three year period following the 11 worst years in S&P 500 index history:

    • The S&P 500 was positive 10 out of 11 times

    • Returns averaged about 10.5% per year

  • In the five year period following the 11 worst years in S&P 500 index history:

    • The S&P 500 was positive 11 out of 11 times

    • Returns averaged about 12.4% per year

As the chart above shows, bad years for the S&P 500 index have eventually been followed by strong periods.

While it can be tempting to shift things around with your plan while investments are declining in value, forwarding looking returns for the S&P 500 index have been higher than long-term averages following the prior 11 worst years (12% average annual return over the following 5 years as shown above).

Further, the worst periods also typically have some of the best days clustered around them, and missing the best days can meaningfully reduce long-term returns.

As the image below shows:

  • From 1930 to 2020, the average annual return for the S&P 500 index was about 9.4% (including dividends) if someone had simply stayed invested through ups and downs.

  • If the person had missed the best 10 days per decade due to market timing attempts, the average annual return dropped to 3.7% (including dividends).

If it was known in advance that markets would continue declining, then shifting some stock funds into money market or CDs could make good sense. The problem is that what markets will do tomorrow isn't known in advance, recoveries can happen swiftly and when least expected, timing re-entry is tough, and missing some of the best days can meaningfully reduce long-term returns as shown in the image above.

Although it may not seem like it at the time, what the image above demonstrates is that shifting things around when markets are down has historically been a riskier strategy than simply staying the course.

While returns this year have been undoubtedly rough for retirement savers, eventually the recovery will arrive, and a sound retirement plan can keep you well-positioned to benefit from the recovery once it arrives.

Investment Planning for Retirement:

The goal of the investment planning process for retirement is to provide you with investment income, when you need it, that lasts for the rest of your life. To accomplish this, a plan must be designed to protect you against four risks: stock market, inflation, liquidity, and longevity.

1 – The “short-term bucket” – This primarily includes bank accounts. This bucket provides liquidity and protection from stock market fluctuations.

2 – The “middle bucket” – This generally includes bonds, investment grade bond funds, and CDs (which are becoming more attractive recently). This bucket is designed to provide some protection from stock market fluctuations, and also a slightly higher long-term expected returns than the short-term bucket.

3 – The “long-term bucket” – This includes quality stock funds. The purpose of this bucket is to provide the growth potential needed to fund a long retirement and address inflation, healthcare costs, and other items that may come up down the road. This bucket will fluctuate in value and will experience down days, months, quarters, and years from time to time like now. However, by keeping an appropriate amount in the short-term bucket and middle bucket (the “appropriate amount” is determined primarily by your unique retirement cash flow needs), you can position yourself to be able to avoid having to sell investments in your long-term bucket at bad times and benefit from the eventual recovery when it arrives.

Having a well-organized, comprehensive retirement plan that provides you with the ability to stay the course is particularly important during tough periods like now so that you can benefit from the eventual recovery when it arrives.

Want To Discuss This Individually?

1 - For clients: Call or email me any time as always.

2 - For non-clients: Complete the form on the website to request a retirement planning consultation:

This is article is for informational purposes only and should not be considered as tax or legal advice. Advice is only provided after entering into an Advisory Agreement with the Advisor. See other disclosure here: Disclosures

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Article Disclosures


Informational Purposes

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.


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