Swedroe: Moderate Your Market Expectations

January 09, 2019

Notably, the graphic shows that a wide range of outcomes is possible over a decade, a good lesson in and of itself. We see a significant number of 116-month periods where the average monthly excess return was 0% or less. The average 116-month period achieved an average monthly excess return of 0.67%.

It also shows, however, that an average monthly return of 1.35%—what the S&P 500 actually achieved from March 2009 through October 2018—is an outlier outcome. Less than 10% of the 100,000 samples achieved monthly returns higher than what the S&P 500 has recently achieved.

You might say this is noteworthy, but not overly impressive. It’s been a great run for returns, but there are at least a significant percentage of bootstrapped histories that exceed the March 2009-October 2018 result.

Different Angle

The picture changes when we look at risk-adjusted returns. Figure 2 is a histogram of the Sharpe ratios across all 100,000 samples. Again, data are from Bloomberg and Ken French’s data library.



As it turns out, a Sharpe ratio of 1.30 or higher was achieved in less than 1% of the 100,000 samples. The actual percentage of samples with a Sharpe ratio higher than what the S&P 500 achieved was 0.57%.

In other words, the risk-adjusted returns the S&P 500 actually achieved from March 2009 through October 2018 are almost outside the range of the possible. In fact, in looking at calendar year returns, S&P 500’s excess return of 16.5% from March 2009 through October 2018 is greater than any decade-long period I could find—from 1950 through 1964, the S&P 500 produced an excess return of 16.2%.

The practical lesson here is that the returns the S&P 500 achieved relative to the volatility investors experienced is virtually unparalleled and may not repeat for many decades to come. This result also lends strong support to expectations for very modest returns going forward.

It’s hard to imagine how the S&P 500’s excess returns, or certainly risk-adjusted returns, could be anywhere near as high over the next decade as they had been recently. Wise investors should maintain a globally diversified approach and appreciate that at least some portion of their portfolio benefited from that historically great run for the S&P 500.

Larry Swedroe is the director of research for The BAM Alliance, a community of more than 140 independent registered investment advisors throughout the country.

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