What to do about Low Returns

October 22, 2017

“I feel like I’m falling behind,” the investor told us.

She’d retired about a year ago, and she figured she could live comfortably off her retirement account for many years as long as her balanced portfolio grew 6% to 8% a year. But in some years, her portfolio had hardly budged.

“I could run out of money if this continues,” she said. “What should I do?”

Low returns put investors’ plans at risk, and investors naturally feel like they should do something about it. But what’s the right thing to do?

In our nearly 50 years of investing, we’ve been through other periods with lower-than-average returns, and here’s what we’ve learned really works.

What to do?

Be aware that changing your long-term investment plan based on one year’s returns is unlikely to turn out well. Adding more exposure to stocks to try to catch up could add more risk than you can handle, and reducing your stock exposure could deprive you of the growth you’ll need to fund your life in retirement.

Your allocation to stocks and bonds should be aligned with your long-term goals, and over the long term, both stocks and bonds have had good gains. But over shorter time periods, like one year, returns typically vary dramatically from their long-term averages.

Range of Stock, Bond & Balanced (50/50) Returns 1950-2016

Source: FundX

Recognize that one-year returns can vary widely from long-term averages

Stocks, as measured by the S&P 500, gained 11.1% annually from 1950 to 2016. But in order to participate in that 11.1% annual return, investors had to stay invested in extreme years when the S&P 500 lost 39% as well as years when the index gained as much as 47%.

Bonds, as measured by the Barclays Aggregate Bond index, gained 6.0% annually since 1950, but on a one-year basis, bond returns also varied considerably, from high of 43% to a low of -8%.

It’s not just U.S. stocks and bonds. The returns of foreign and emerging market stocks also vary from their long-term averages.

Stay Balanced

If you need to grow your portfolio 6% to 8% a year, historically a balanced portfolio has done just that. A portfolio of 50% stocks, as measured by the S&P 500, and 50% bonds, as measured by the Barclays Aggregate Bond index, gained 8.9% annually from 1950 to 2016.

But the balanced portfolio rarely returned 8.9% in any calendar year; the annualized 8.9% return smoothed out a wide range of calendar-year returns, from a high of 33% to a low of -15%.

Keep a long-term focus

During the year when a balanced portfolio lost -15%, it probably didn’t feel like the portfolio was going to be able to deliver an annualized 8.9% return over the long term. But if we hope to be successful investors, we need to stay focused on the long-term, even during short-term setbacks.

We’ll likely experience years when it may not feel like we’re on track to reach our goals. These years can make us doubt whether our allocation or our strategy can really help us get ahead. But history shows that if we hope to participate in the terrific long-term results of stocks and bonds, we need to stick with our plan and stay invested, even through challenging markets.

Low-return years can be particularly worrisome for retirees who hope to take a steady paycheck from their retirement accounts. But we can’t expect our investment returns to be as consistent as a paycheck. We may have to accept that we’ll have some low-returning years and some high-returning years over the long term.

Even in retirement, you are a long-term investor. You won’t need all of your money at once, and given today’s life expectancies, new retirees could be invested for another 20 or even 30 years. In that context, even three or four lower-than-average years probably won’t derail your long-term plans.

Take the Next Step

There may be more that you can do in flat markets. When you set up a retirement consultation, we’ll help you look at the big picture and come up with a plan that works for you.

Click here to get started.

An earlier version of this article originally appeared on Forbes.

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