DeLaSoul said, ''3 is the magic number," back in 1989 on their unforgettable debut album "3 Feet High and Rising." While they may have sampled Johnny Cash's "5 feet High and Rising," they were admittedly not stock prognosticators. Two years removed from Black Monday in 1987, the stock market went on to return 558% over the next 18 years, or nearly 7%, with dividends reinvested. A seven percent annual return was the new normal. Investing gurus from Warren Buffett to Jack Bogle told us we could expect that from the stock market, and we believed them.
We weren't wrong to do so.
Even with the historical crash and recession of 2008, those who stayed invested in the S&P 500 or DJIA, should be very happy with the way things worked out. The last 8 years have given us a better than 12% return in the S&P 500 with dividends reinvested. Thank ultra low interest rates, quantitative easing, the lack of black swans and TINA for that. But, if you listen to today's Masters of the Universe, it might be time to sing along with Don Meredith at the end of Monday Night Football in the 1970's: "Turn out the lights – the party's over."
BlackRock's Larry Fink told CNBC in an interview that investors should expect to see 4% returns over the next decade with a "balanced portfolio." He warned that investors could see markets turn abruptly the other way at some point, where losses in a year could be as high as 40%. Fink wouldn't put a date on that unfortunately, but he's only telling us what history has shown. The Bear Market of 1929 lasted until 1932 and served up an 80% drop. The oil embargo of 1973 kicked off a bear market that lasted until 1974, delivering a 48% loss. The most recent Bear Market from 2007 to 2009 clawed out a 56% loss. These things happen, but the stock market and investors who have believed in it have proven to be resilient and have been rewarded for their patience. But the "new normal," this is not.
Vanguard's Chairman and soon to be former CEO, Bill McNabb, told us last Spring that the gravy train was slowing down. He also said to expect about 4% going forward if investors maintain a balanced portfolio. McNabb and Fink are not just throwing darts. Their respective firms manage nearly $10 trillion of our money, a lot of it parked in ETFs, index funds and gigantic mutual funds. It's the law of the large numbers, and we should get used to it. The value of the S&P 500 is North of $2 trillion. A big chunk of that is thanks to FAANG stocks like Amazon.com Inc. (AMZN), Apple Inc. (AAPL), and Facebook Inc. (FB). It takes a lot to move that index higher given how it has swelled in just the past 2 years, but very little to take it down a few notches.
So, what is an investor to do? Keep in mind, Fink and McNabb were talking about expected returns with balanced portfolios. We need that balance, especially as we get older – and we are getting older. Nobody has all the answers, but we'd be wise to listen to the sages that have witnessed and navigated several of the nastiest markets of the past 50 years. Vanguard founder Jack Bogle is one of them, and his message to investors has remained constant and clear: "Stay the course and press on, no matter what."
Caleb Silver - Editor in Chief