Author: Marty Moore, CFP®
What Happens Next?
Since bottoming on March 23rd last year the stock market is up an astonishing 86% (S&P 500 total return). This is a huge advance, of course. That kind of pace won’t (can’t) continue… of course. And we also know that when the market is up big there is an increased chance of a follow-on large drop. All common sense – the market goes up and down, oftentimes up a lot and down a lot.
So, the obvious question arises: After such a big advance, what comes next? Aren’t we due for a big drop?
At some point, yes, we’ll have another not-so-pleasant market decline… at some point. The unknown question is: When?
What does history tell us about what happens after a big advance in the market?
Here is the average one year, three year and five year total gain following a 12 month gain of 50% or more (since 1950):
One year – -1.5%
Three year – 42.4%
Five year – 65.6%
(Table by Ben Carlson and YCharts; Fortune magazine)
It’s not surprising that the one-year return is negative. In fact, 65% of the time after a 12-month advance of 50%+, the market produced a negative return. But… 25% of the time the market continued upward producing a double-digit return.
Timing the market is difficult, that we know too… of course.
As we can see, though, the further out you go the better the returns. There wasn’t a single 3-year period following a 12-month 50% gain that produced a negative return. There was one 5-year period that produced a negative return, and that came in 2000-2005 after the dot-com bubble of the late 1990’s.
There is always a good reason to ‘get out of the market’. Now may be the right time but we’ll only know that in hindsight. As the above chart shows, we should probably temper our expectations for what the market will do over the coming year but the evidence for making a bold shift to get out of or reduce stocks significantly isn’t strong enough. And, even it if were, we would then be faced with an even more difficult decision later: When to get ‘back in’?
Return on Tax Investment
You might wonder what you get in return for your tax dollars. The question isn’t so far-fetched; after all, the government collects those taxes—theoretically, at least—in order to give you back a comparable value in services like police protection, education, infrastructure and a social safety net.
Are we getting what we pay for?
A recent study by the WalletHub website asked a team of experts to calculate which states offers the highest return on your tax “investment” based on different components of health, safety, the economy, education, infrastructure and pollution. Among the factors under ‘education’ were the quality of the school systems and universities, the public high school graduation rates and funding of Pre-K programs. The metrics for ‘safety’—basically police protection—included the violent crime rate per capita, property crime rate and traffic fatalities. Economy: median household income and unemployment rate. Infrastructure: the average commute time to and from work, parks and recreation opportunities, water quality and highway spending per driver. Health metrics included hospital beds per 1,000 residents, average life expectancy at birth and average health insurance premiums.
On the other end, the study looked at the tax rates of the different states—the “tax investment” that state residents were asked to make in return for the services they received.
The results? New Hampshire finished with the best “taxpayer ROI” score; its residents paid the second-lowest amount of per-capita taxes in the country, yet the state offered, according to the survey, the 9th best overall government services rank. Next came Florida, whose residents pay the fewest taxes of any state, and receive the 30th best combination of government services. South Dakota came in third: it finished 6th in overall taxes paid, and 21st in government services. Others in the top 10: Virginia (23rd in taxes paid, 3rd in services); Missouri (3rd and 38th); Ohio (12th and 26th); Texas (7th and 35th); Georgia (9th and 34th); Nebraska (24th and 12th); and Tennessee (4th and 41st).
At the bottom of the list, as you might expect, were some of the highest-taxed states. Number 50 was Hawaii, which ranked 49th in taxes paid (in other words, higher than every state but North Dakota), and just 33rd in services. California came in second-last (45th, 37th), followed by New Mexico (37th, 49th), North Dakota (50th, 4th), Delaware (44th, 17th) Nevada (26th, 44th) and New York (43rd, 19th).
The states with the highest rated services were Minnesota (47th, 1st) and Vermont (48th, 2nd). The article further breaks down states with the best school systems (Massachusetts, Connecticut and New Jersey), the best hospital systems (Vermont, South Dakota and Iowa), the lowest violent crime rate (Maine, New Hampshire and Connecticut), and the lowest percentage of residents living in poverty (New Hampshire, Maryland and Hawaii). The worst government services “awards” went to Louisiana (50), New Mexico (49), Alaska (48), Mississippi (47), South Carolina (46) and Alabama (45).
North Carolina came in 20th overall – 17th in taxes paid and 32nd in government services.
Here is a link to the full article: https://wallethub.com/edu/state-taxpayer-roi-report/3283
The Miracle of Compounding
You learn about the power of compounding at an early age. Compound interest has been called the eighth wonder of the world. As Kiplinger magazine once wrote: There’s good reason for this. It magically turns a little bit of money, invested wisely, into a whole lot of cash. The concept simply involves earning a return not only on your original savings but also on the accumulated interest that you have earned on your past investment of your savings.
These examples are hypothetical only, and do not represent the actual performance of any particular investments. Investments in securities do not offer a fixed rate of return. Principal, yield and/or share price will fluctuate with changes in market conditions and when sold or redeemed, you may receive more or less than originally invested.
Some might consider Warren Buffet to be the greatest investor ever. He has amassed a net worth of over $100 billion. Hard work and brilliant analysis are surely a big reason why. But did you know that he has accrued at least 95% of his wealth after age 65? (He is now age 90.)
That’s the power of compounding… and a testament to consistency of saving and investing.
Did you also know that he has pledged to donate 99% of his wealth? So far, he has donated $41 billion, mostly to the Gates Foundation and other foundations.
In the End
Some of history’s most famous speeches have been scripted in the movies. One of my favorites that has stuck with me over the years is from Robert Duvall in the movie “Secondhand Lions.”
“Sometimes the things that may or may not be true are the things that a man needs to believe in the most. That people are basically good. That honor, courage and virtues mean everything. That power and money, money and power mean nothing; that Good always triumphs over Evil; and I want you to remember this: That Love, true Love never dies. Doesn’t matter if any of this is true or not. You see a man should believe in these things because these are the things worth believing in.”
Here’s the movie clip: https://www.youtube.com/watch?v=duu0bCkSlUo
As always, thanks for reading.
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