Contributed by: Nicholas Boguth, CFA®, CFP®
Over the past year, the S&P 500 has had a fantastic run and was up 38% (10/31/23 to 10/31/24). Does that mean we should expect lower returns in the next 12 months? Absolutely not, at least not for that reason.
Many investors get nervous after a very positive year. You may hear things like:
“Stocks have been on a great run, so there is no way this can continue.”
“Trees don’t grow to the sky!”
“The past year was well above average; we’d expect mean reversion and lower returns going forward.”
But the truth is, the next year of stock returns has almost nothing to do with the previous year. The chart above shows the last 12 months’ return on the horizontal axis and the next 12 months’ return on the vertical axis. This is monthly U.S. large stock data since 1934 (90 years of data – over 1000 monthly readings!). If higher return years were generally followed by lower return years, you’d see the dots above in a tighter, more downward-sloping line. This is not a tight downward sloping line. This looks like my toddler got excited with a blue marker.
Statisticians call this a “random walk,” but practically speaking, all it means is that negative years can happen no matter what happened last year, and positive years can happen no matter what happened last year! Past performance is no guarantee of future results. On average, though, we know that the stock market goes up more than it goes down, diversification is key to smooth out the ride, and a well-designed financial plan is the foundation of it all. Please contact any of us here at the Center if you have questions about any aspect of your financial plan.
Nicholas Boguth, CFA®, CFP® is a Senior Portfolio Manager and Associate Financial Planner at Center for Financial Planning, Inc.® He performs investment research and assists with the management of client portfolios.
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Diversification and asset allocation does not ensure a profit or protect against a loss.
The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Inclusion of indexes is for illustrative purposes only. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transactions costs or other fees, which will affect actual investment performance.
Any opinions are those of Nicholas Boguth, CFA®, CFP® and not necessarily those of Raymond James.