Well, the year 2023 is officially a wrap. Overall market performance was relatively strong, with equities, defined as the total return of the S&P 500, up 26.29% for the year, and bonds, defined as Bloomberg U.S. Aggregate Bond Index, up 5.53%.
The strong performance of equities in 2023 was somewhat unexpected, with many market forecasters predicting lower returns at the beginning of the year, especially with growing concerns of a recession. The stock market return for 2024 is equally uncertain, and many investors may be looking to cash, given attractive yields exceeding 5%; however, it’s important to remember that equities have dramatically outperformed cash historically, especially over longer investment periods, and are expected to do so into the future.
Therefore, the case for equities is as strong today as ever, but it’s important to ensure the risk level of your portfolio is appropriate and to stay invested for the long term!
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
A look back in time
There has always been risk associated with investing in equities, especially over shorter periods, which is why it’s important to take a long-term perspective when it comes to investing. If we look at total returns for U.S. equities from 1926 to 2023, which include the performance benefit of dividends, they’ve been positive for 73.5% of calendar years with an average annual long-term geometric return of 10.35%, as demonstrated in the chart below.
It’s important to note, though, while the total return on stocks has been positive for 73.5% of calendar years, if we look at five-year periods, it’s been positive 87.2% of the time, and if we look at 10-year periods, it’s been positive 95.5% of the time. In other words, being invested for the long term has definitely benefited investors.
The current high returns on cash, which exceeded 5% at the beginning of the year, may have many investors rethinking their longer-term strategy allocations and possibly underweighting equities in their portfolios. While it’s true that current cash yields are significantly higher than long-term averages, equities have dramatically outperformed cash over the long term. Looking at returns from 1926 to 2023, equities have outperformed by 6.9% per year on average and had a higher return 67.4% of the time, as demonstrated in the chart below.
Clearly, there have been times when cash has outperformed equities, in particular those years when the return on equities was low or negative, but over the long term, equities have dramatically outperformed cash. For example, stocks outperformed cash 76.6% of the time over rolling five-year periods and 85.4% of the time over rolling 10-year periods. Therefore, it’s important to take a long-term perspective when it comes to investing.
While it obviously is difficult to predict where the market is headed, one of our affiliates, PGIM Quantitative Solutions, does create forward-looking return estimates for the next 10 years. These forecasts can be used to help create expectations for investors around likely future returns. The latest return expectations available, as of Q4 2023, are included below, for a few common asset classes.
Some important things to be aware of with respect to these forecasts. First, there is still the general expectation that stocks will outperform cash and bonds into the future, but at lower levels than have been experienced in the past. Second, the forecasted return for U.S. equities over the next 10 years, at 7.2%, is notably lower than the historical long-term average, at 10.2%. This is more than 3 percentage points lower and important for investors to be aware of when running any kind of financial plan, given the pronounced potential effect.
For example, $1 invested at 7.2% for 10 years would grow to roughly $2 at the end of the period vs $2.66 if invested at 10.2%, which is roughly one-fourth lower.
Going forward
The common expression that past performance is no guarantee of future results is true today more than ever. Since it is impossible to know what’s going to happen in the financial markets, one of the most important things to try to control is investor behavior, by ensuring your portfolio is consistent with your objectives and staying invested for the long term.
Related Content
- Expecting a 12% Return on Your Portfolio? That’s Dangerous
- Your Retirement Readiness Rx: Plan Early and Get Help
- Four Historical Patterns in the Markets for Investors to Know
- Five Common Retirement Mistakes and How to Avoid Them
- What’s the Difference Between Average and Actual Rate of Return?
-
The Most Tax-Friendly States for Investing in 2025 (Hint: There Are Two)State Taxes Living in one of these places could lower your 2025 investment taxes — especially if you invest in real estate.
-
Want To Retire at 55? See If You Can Answer These Five QuestionsWho said you can’t retire at 55? If you say yes to these questions, you may be on your way to an early retirement.
-
Potential Trouble for Retirees: A Wealth Adviser's Guide to the OBBB's Impact on RetirementWhile some provisions might help, others could push you into a higher tax bracket and raise your costs. Be strategic about Roth conversions, charitable donations, estate tax plans and health care expenditures.
-
One Small Step for Your Money, One Giant Leap for RetirementSaving enough for retirement can sound as daunting as walking on the moon. But what would your future look like if you took one small step toward it this year?
-
This Is What You Really Need to Know About Medicare, From a Financial ExpertHealth care costs are a significant retirement expense, and Medicare offers essential but complex coverage that requires careful planning. Here's how to navigate Medicare's various parts, enrollment periods and income-based costs.
-
I'm a Financial Planner: Could Partial Retirement Be the Right Move for You?Many Americans close to retirement are questioning whether they should take the full leap into retirement or continue to work part-time.
-
From Mortgages to Taxes to Estates: How to Prepare for Falling Interest RatesAs speculation grows that the Federal Reserve will soon start lowering interest rates, now is a good time to review your financial plans for housing, estate, taxes, investing and retirement to make the most of potential changes.
-
This Is How Lottery Winners Build Lasting Legacies, From a Financial ProfessionalWinning a massive lottery jackpot, like the recent $1.4 billion Powerball, requires seeking immediate legal and financial counsel, protecting your identity and winnings and planning your legacy.
-
I'm an Investment Strategist: This Is How the Fed's Next Rate Move Could Impact Your WalletInterest rate cuts might be coming, which could affect everything from your credit card debt to your mortgage. It's smart to prepare now — here's how.
-
I'm a Retirement Planner: These Are Three Common Tax Mistakes You Could Be Making With Your InvestmentsDon't pay more tax on your investments than you need to. You can keep more money in your pocket (or for retirement) by avoiding these three common mistakes.
