Written by Tyson Ray, FORM Wealth Advisors | CFP®, CExP®, CIMA®
In this blog post, we’re diving into the perspective of time and what history can teach us about investing in the future. Understanding past market behavior can help us frame what might happen in the future — like in 2025 — with all the changes we’re seeing.
Markets are unpredictable year to year, but history shows that long-term averages, such as 10 to 12 percent returns, are the key to growing wealth. It’s important to learn how to balance short-term needs with long-term goals. Doing so can help ensure you don’t outlive your money once you retire.
A look at 20 years of investments
History is the only guide we have to try to understand what the future might hold. As investors, we tend to hyper-focus on what happened yesterday or this morning; however, we can learn a lot from analyzing trends.
Let’s look at the past 20 years to get a better idea of what any average year could look like. This chart shows what the average return was for five asset classes over the past 20 years.
Specifically, the chart shows how large caps, small caps, emerging markets, developed markets and cash performed during those two decades. For each asset class, you can see what the best year and worst year was, in terms of performance.
What I want you to gather from this chart isn’t really any specific number.
The takeaway here is that the market can, and does, produce declines as well as gains. Just as your portfolio could drop 20 to 40 percent, it also could increase in value. Markets have always fluctuated, and they always will; the key is always to stay the course, focus on your goals and avoid overreacting to fluctuations.
What history shows us
Here is what the bigger message of this chart demonstrates: The best way to build wealth is to tolerate the downs that no one likes and to avoid overreacting too much to the ups that everyone gets excited about.
Historically speaking, keeping your assets invested so you can realize a long-term average gain of 10 to 12 percent is one of the best ways to grow wealth. This is something we work with our clients to try to achieve. We also encourage them to focus on their long term goals and to avoid making any knee-jerk actions based on short-term changes. It’s also important to know that, even if you have experienced positive performance in your portfolio at some point, past performance is no guarantee of future results.
The question isn’t how much your portfolio might drop in value in the case of a market downturn. A better question to ask yourself is, “Do I have the right financial portfolio that aligns with my risk tolerance, goals and time horizon to take advantage of market risk premiums?”
As always, investing is a long-term game. You will always have a better outcome by staying the course than you will by trying to time the market.
When investors bail out of the market during a downturn, in an effort to minimize their losses, the result is that they can miss key market days that can impact their overall returns. Over the past 15 years, the S&P 500 has grown at an annualized rate of 6.9 percent. However, removing only the five best trading days over that 15-year period would bring the index’s total growth down to 3.7 percent, and missing the 20 best trading days pulls its return to –1.8 percent.
Keep cash on hand in case of a sell-off
As we navigate 2025, I encourage you to focus on what you need in cash for the next 12 months, in case there’s a sell-off.
We need cash on hand during a market sell-off because it provides liquidity, enabling us to buy assets at potentially lower prices during the downturn instead of being forced to sell any of our existing holdings at a loss if we need to access money quickly. Cash is a safety net that can help us take advantage of opportunities when the market is falling.
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As with any aspect of life and finances, let’s keep some perspective and focus on the big picture. When markets fluctuate, consider a broader historical perspective before changing your financial course. The right knowledge and historical perspective can help investors avoid making investment decisions based on emotion rather than strategy.
In 2025, the unknown will play out one day, one week, one month at a time — just as it always has and always will.
We are here to guide you through whatever happens with the markets, the economy and your personal situation. Please don’t hesitate to reach out to us if you have questions or want to review how well your portfolio aligns with your goals.
