The Hare and the Tortoise is a classic Aesop fable. A story we know well. The hare mockingly asking the tortoise, “Do you ever get anywhere?” Of course, we know how the story ends. The tortoise “kept going slowly but steadily, and, after a time, passed the place where the Hare was sleeping.” Practicing a life of slow and steady is harder than it looks. We are an impatient nation addicted to getting our way as quickly as possible.
I recently lost a client who wanted to arrive at the finish line faster than scheduled. He mentioned a relative who was investing in growth stocks and generating returns of “20% to 30% or more.” Since the market low on March 23, the NASDAQ has risen 71%, and stocks like Shopify and The Trade Desk have risen more than 320%. The recent pandemic has turned Robinhood traders into stars, and one celebrity repeatedly mocks Warren Buffett and has said, “Trading is easy.”
The curious thing about my call with my former client is that it resembled one I had with another client in December 1999. At the time, the NASDAQ had risen 53% in two months as investors speculated on internet and dot com stocks. He, too, wanted to grow his account faster. He was not satisfied with his returns, and he felt like he was missing his chance to strike it rich. The NASDAQ would rise another 24% as it reached a peak in March 2000. The NASDAQ would fall 78% before it hit rock bottom in December 2002. If you invested at the market top in 2000, you had to wait sixteen years before the index eclipsed its previous high.
At times, I think it’s easier to make 50%, 100%, or more in short-term trading bursts than earn 8% for 10, 20, or 30 years. It’s possible to catch lightning in a bottle, but the key to creating generational wealth is how you react after a market crash. How many investors in 1999 remained invested for sixteen years to recover their costs or buy stocks at low prices? My guess, not many.
When the market corrects, the slow and steady crowd takes over, systematically investing while following their plan. Warren Buffett said, “The stock market is a device for transferring money from the impatient to the patient.”
The 100 year average for stocks has been 10%, and it’s been 5.6% for long-term bonds. Since 1926, a portfolio consisting of 50% stocks, 50% bonds generated an average annual return of 8.55%, and it has made money 79% of the time, which means 21% of the time it lost money.[1] And, in some years it lost a lot. In 1931, the portfolio lost 38%; from 1984 to 1987, it dropped 19.8%. How you manage your investments and emotions in down years determines your wealth in up years.
A 50/50 portfolio has performed well for 1, 3, 5, and 10-years, averaging 12.18%, 12.10%, 10.54%, and 10.73%, respectively.[2] The 20-year average annual return has been 7.87%. You don’t need to make substantial gains to achieve your goals, though it would be nice. If you earn 8% per year, you can double your money every nine years.
I started my investment career in May 1989, and since then, the NASDAQ, Dow Jones, and the S&P 500 are up considerably, rising 2,660%, 1,130%, and 1,070%, respectively. However, during the past thirty years, the market has fallen several times. The NASDAQ fell 78% from 2000 to 2002. In 2008 and 2009, the S&P 500 dropped 48%. In December 2018, the Dow Jones pulled back 18.15%. This year, the three indices fell an average of 33.5%. If you invested in each index equally for the past three decades, your average annual return was 8.94% before dividends. A $10,000 investment is now worth $130,500.
Individuals who complete a financial plan are likely to stay invested through good markets and bad. If you don’t have a plan, you may panic and sell your stocks when times are tough. In March and April, we fielded several calls from clients who wanted guidance on how to handle the sell-off. We reviewed their plans and told them to remain invested because the market correction did not impact their financial goals.
The hare lost the race because he was impatient and overconfident. If he had a plan and followed it, he would have beaten the tortoise by a mile, and Aesop would not have written his famous fable.
The race is not always to the swift. ~ Aesop Fable
November 13, 2020
Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.
Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.
[1] Dimensional Funds Returns Web
[2] Ibid