Setting Your Expectations

Chart of the Week: Setting Your Expectations

January 10, 2022

At the start of every year, investors are inundated with outlooks and forecasts—most aren’t worth the paper they are written on. Rather than speculate on the future, I like to look back and see what history suggests our baseline expectation should be for market returns.

I examined rolling 12-month returns for the Vanguard 500 Index (as my proxy for stocks), Vanguard Total Bond Market Index (bonds) and Vanguard Cash Reserves Federal Money Market (cash) since each fund’s inception. The record tells us to enter the year expecting gains. Stocks—which should beat bonds, and both should beat cash—were positive in 82% of the 532 rolling 12-month periods, with an average gain of nearly 13%.

In other words, the burden of proof should always be on the pessimists calling for crashes. Sure, they’ll be right from time to time, but most of the time, and over time, the optimists triumph.

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Note: Chart shows average 12-month rolling returns through Nov. 2021 using month-end periods from Aug. 1977 (Vanguard 500 Index), Dec. 1987 (Vanguard Total Bond Market Index) and June 1976 (Vanguard Cash Reserves Federal Money Market). Sources: Adviser Investments, Morningstar.

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