Keep Investing!

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Every year, I update a unique investment image I call the Index Matrix®, which shows how the U.S. total stock market has performed over any calendar year or multi-year period since 1928. I also produce one for U.S. small value stocks (higher historical returns) for comparison purposes.

We use a heat map visualization technique, so our clients can very clearly see how patience has been rewarded by U.S. stocks over time. This almost always results in a very satisfying “Aha!” moment for everyone who stops to study the matrices.

When Equius advisors present the data, we usually leave the annual returns out of the matrix cells because they tend to wash out the visual power of the heat map technique, and 4,371 numbers—even on a large wall poster—can be a bit overwhelming.

But there is at least one good reason to study the Index Matrix with the returns in the cell: investors who contribute every year—or every pay period, like 401(k) participants—can see the rate of return on capital invested each year and immediately appreciate the power of systematic investing.

To illustrate this, I’ve isolated the past 21 years of U.S. total stock market history on the matrix. Here are a few observations I think you’ll find interesting. 

First, starting in the year 2000 (-8.4%) and moving up 10 years, you’ll see evidence of “the lost decade” for U.S. stocks: -0.0% (more precisely, -0.01%). But if you move all the way to the top of the matrix, you’ll see an annual return of 7.3% for the full 21 years.

That’s about 3% less in annual performance than the historical average of 10.0% since 1928. But it’s not bad considering that it includes bigger losses over the next two years as well as the very steep decline of 2008.

Capital invested in the total market each year after 2000 compounded at a higher rate (top cells). Ten-year periods from each starting year are also highlighted with the white band.

The U.S. stock market has compounded at a rate of 15.5% per year since 2009. But let’s consider—for anti-market timing reasons— how capital invested the year before has performed. After the brutal 36.6% decline in 2008, that capital has compounded at a slightly higher rate (10.3%) than the historical rate of return (10.0%) for the full 13 years. Patience rewarded.

I believe this is a perspective all 401(k) investors (or any investor who makes annual contributions to a portfolio) should be exposed to. Too often we pick a time period, say, 2000 to 2009, and discuss the total loss over the period without considering that many investors also invested new capital in 2001, 2002, 2003, and so on—all of which compounded at higher returns over 10 years.

This perspective should also be considered by investors in multi-asset class portfolios. We wouldn’t be surprised if capital invested today in large growth stocks compounds at a much lower rate than their historical average over the next 10 years given their current high prices. We also wouldn’t be surprised if large and small value stocks—given their much lower relative prices today—compound at higher-than-historical rates of return for many years to come.

Again, systematic investing with periodic rebalancing tends to smooth out these return differences, resulting in an expected mix of the historical return for each asset class over time. Wise investors know this intuitively, but sometimes a picture is worth a thousand words.

Equius Partners, Inc. is a Registered Investment Advisor.

Past performance is not a guarantee of future results. The data and information set forth herein are provided for educational purposes only and should not be considered tax, legal or investment advice; a solicitation to buy or sell securities; or an opinion on specific situations – as individual circumstances vary. There is no guarantee an investing strategy will be successful. Investing involves risks, including possible loss of principal. Diversification does not eliminate risk, including the risk of market or systemic loss.

Please consider the investment objectives, risks, and charges and expenses of any mutual fund and read the prospectus carefully before investing. Indexes are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.

© 2023 Equius Partners, Inc.

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