“Sequence of events risk” refers to how markets perform after dollars are invested. The reason why it’s significant is because when a person retires may determine whether their plan is ultimately successful. Unfortunately, you can’t preplan a sequence of events as it relates to investment performance.
Let’s say, for example, a worker retires the year the stock market is at an all-time low. While that individual may anticipate the worst heading into his/her retirement, it’s likely that equity markets will reward that individual handsomely. As we know from following the history of the stock market, markets ultimately bounce off lows and often reach new highs.
The exact opposite is currently occurring, with markets at or near all-time highs. Thus, it might be logical for an investor to assume that markets will ultimately fall, concluding that this is not the best time to invest (or retire). While it might be logical to assume markets will fall at some point, postponing equity investments might be the wrong decision.
What matters most for investors is not when they invest but for how long they remain invested. In other words, while timing rarely works, time-in virtually always succeeds.
The chart below1 from Ben Carlson, creator of the “A Wealth Common Sense” blog, shows market performance over time for the S&P 500. (While client portfolios are comprised of far more assets than just the S&P 500, the chart is helpful to illustrate the point about time in the market) An investor who purchased the S&P 500 on the first day of 1993 averaged 10% annual returns over the next 31 years. Similarly, an investor who purchased the S&P 500 on the first day of 2005 also averaged 10% annual returns over the next 19 years.
If we think back to the housing and market crash of 2008, investors who purchased the S&P 500 on the first day of 2008 suffered a devastating loss of 37%. Over the next 16 years, however, they still averaged 10% annual returns.
An average is a mathematical equation. One should never expect to actually get a 10% return on their equity investments every year. In reality, equity markets rarely grow by exactly 10% in any given year. It’s the commitment to remain invested that pays off over time, even when equity markets are at or near all-time highs.
1 Carlson, Ben. “31 Years of Stock Market Returns.” A Wealth of Common Sense, 3 Sept. 2024, awealthofcommonsense.com/2024/09/31-years-of-stock-market-returns/.
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by S.F. Ehrlich Associates, Inc. (“SFEA”), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from SFEA. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. SFEA is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of SFEA’s current written disclosure Brochure discussing our advisory services and fees is available upon request. If you are a SFEA client, please remember to contact SFEA, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing, evaluating, or revising our previous recommendations and/or services.
