Stock Market History Offers Context. Your Plan Still Matters.

Written by the William Allan team · Published 2023-01-19T12:00:00.000Z

With the turn of the calendar, investment professionals roll out their thoughts on all things financial, leading to the big prize… a stock-market prediction. Forecasts often receive more attention than the uncertainty behind them.

This is an emotional moment for many investors, especially after a down year. The S&P 500 returned approximately -18.1% in 2022, including dividends, its worst calendar year since 2008. S&P’s January 2023 review documents that result. Anxiety and anticipation about what comes next are understandable.

Historical returns can provide perspective. In Aswath Damodaran’s US stock-return series, most calendar years from 1928 through 2022 were positive, with dividends included. But consecutive losses occurred, including 2000, 2001, and 2002. Those observations describe a selected historical sample, not the probability of a gain in 2023. The historical return series supplies the underlying data.

Would Another Weak Year Change Your Plan?

The effect of a negative 2023 would depend on the investor’s circumstances. A long horizon alone does not make a decline harmless.

Someone adding regularly to a retirement account may buy more shares with the same contribution when prices are lower. That can help if the investment subsequently recovers, but the investor’s existing holdings have also lost value and a recovery is uncertain.

Someone withdrawing from a portfolio faces a different problem. Selling assets after a decline to cover living expenses can leave fewer shares available for a later recovery. The timing of returns and withdrawals can materially affect how long a portfolio lasts. Cash needs and risk capacity deserve attention before a difficult year arrives.

The Lost Decade and Some

The market’s experience after the 2000 peak is a reminder that stocks can struggle for a prolonged period. It is also a reminder to distinguish a price-index headline from an investor’s actual experience.

Dividends, contributions, withdrawals, fees, taxes, and the exact dates all affect the result. A long-run average is not a return that arrives evenly each year, and a price decline does not mean an investment is automatically cheap relative to its prospects.

For many savers, regular contributions come through a payroll deduction. Those contributions buy shares at different prices. Continuing them can support a disciplined plan when the investment and risk level remain suitable. It does not establish that every saver benefits from a weak market, nor does it guarantee a favorable ending balance.

What History Can—and Cannot—Do

History can remind us that difficult markets have occurred before and help us consider a range of outcomes. It cannot tell us when another recovery will begin or whether a particular retirement plan can withstand another loss.

As we state repeatedly, investing is a long-term exercise. The useful work is to connect the portfolio with its purpose: what the money is for, when it may be needed, how contributions or withdrawals affect it, and how much uncertainty the investor can bear.

Here’s to a thoughtful 2023, irrespective of what Mr. Market does.

This commentary is for informational purposes only and is not investment, tax, or legal advice. All investing involves risk, including the possible loss of principal, and past performance does not guarantee future results.