Great Expectations

Paul R. Ruedi, CFP®

I recently hired an appliance repairman to fix a cooktop and ended up in an interesting conversation about investing. When he heard that I was a financial advisor, he did the same thing 9/10 people do: told me about his investment portfolio. I suppose he wanted to see if the look on my face showed any signs of concern.

He brought up that he does his investing in an S&P 500 index fund. I breathed a sigh of relief. I could tell him he was doing a good job, perhaps bring up the need to diversify internationally and add smaller companies in the US, and leave it at that. 

But it was the second part of the explanation that gave me pause. “Yeah, I just set it and forget it and collect my 17% per year.”  Though I couldn’t see it, I am sure my expression changed. My tone changed from a relaxed “all good” to a skeptical “not so fast!” 

The worst part is, as far as recent history is concerned, he wasn’t wrong. In fact, he was underselling it! If you look at the three-year compound return of the S&P 500 as of early November, the annualized compound return over those three years is just over 20% (and slightly higher if you include dividends).

The last few years have been extraordinarily good for the S&P 500. So I had to remind him of this and try to set appropriate expectations. For that we simply have to look to the other side of history. Because after all, if returns can be well above average for several years straight, they can certainly be below average for several years straight. 

The best reminder I have to rein in investor expectations, and the one I immediately brought up in this conversation, is the lost decade. From the beginning of 2000 to the end of 2009, a dollar invested in the S&P 500 actually fell in value. Even with dividends reinvested, S&P 500 investors were still down roughly 9% after an entire decade of patiently sticking with their investments.

This is not to say that I expect another lost decade any more than I expect another three years of extremely good returns. But it can happen. We as investors must understand what we are signing up for, and set our expectations accordingly. If your expectations have become a little too rosy after we have been spoiled by the last few years of extremely good returns, you may want to bring those expectations back down to reality.

Paul R. Ruedi is a CERTIFIED FINANCIAL PLANNER™ professional with Ruedi Wealth Management in Champaign, Illinois.