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Welcome to the Stay Wealthy Podcast and Happy New Year. I'm your host, Taylor Schulte, and today I'm recovering from a little technical issue that we had here on the podcast. In the chance you saw or even listened to yesterday's episode, which aired on our typical Tuesday morning schedule, you might notice that it's no longer in your podcast feed.
But don't worry, I'm going to quickly summarize what you might have missed yesterday and use it as a foundation for today's what I'm going to call bonus episode about market predictions and forecasts. And if you happen to catch yesterday's episode, you can go ahead and fast forward through the next two minutes or so, or just stick around and get a quick refresh before I move into today's topic.
So in yesterday's episode, I briefly shared two updates. One was a big thank you to the almost 200 listeners who threw their name in the hat for the Stay Wealthy sweatshirts and completed the survey. Many of you went above and beyond to provide optional written feedback to help improve this show, which was incredibly generous and helpful. So thank you very, very much.
For those of you that completed the survey, the winners' names have been drawn and you'll hear from me by the end of this week with an update and next steps to claim your Stay Wealthy sweatshirt.
The second update was with regards to our foundation leak, which I shared about in the last episode of 2021. After sharing that episode, a number of listeners reached out to me with your personal stories about water damage insurance claims. And it sounds like many of you have started to reach out to your insurance agents to confirm what's covered and what's not covered, especially when it comes to water damage.
So when and if you get a clear response from one of your agents, please do let me know what they say so I can validate some of the comments I made last month and help everyone better understand how insurance companies are handling these types of claims.
I also shared that while everything has gone very smoothly for my family and I with regards to insurance and the handling of our repairs, by the way, which will be in the six figures here soon, we'll be out of our house for another 30 days still, making this almost a two-month process.
But in a weird way, we've kind of enjoyed it. We've learned a lot and we've had a lot of fun staying in what will be our fourth home as we gear up to move to our last and final Airbnb later this week. The kids think this is the longest vacation of their lives, so it'll be quite the wake-up call when we have to move back into our home. Okay, with those updates out of the way, let's get into today's episode. For all the links and resources mentioned, head over to youstaywealthy.com forward slash 138.
Okay. As mentioned, I'm going to quickly recap yesterday's episode and use it as a foundation for today's bonus topic about market predictions and forecasts. My apologies again for the technical issues to start the year and thank you very much for bearing with me. So
So yesterday I had shared that the stock market tends to surprise the majority of people. Hindsight is 20/20 and looking back, it might seem like the last three years and the market's performance makes perfect sense. But if we're being honest and objective, I would argue that the last three years surprised the majority of investors.
Even the so-called experts. For example, you might remember that in December of 2018, the S&P 500 dropped almost 20% in a short period of time. Very few people were optimistic after that heading into 2019, and yet the S&P 500 returned north of 30% that year.
2020 caught even more people off guard. As COVID-19 made headlines, the S&P 500 dropped 34% in 33 days. It was the fastest bear market in history. And if that wasn't surprising enough, the stock market bottomed mid-March of 2020 and ended the year with a positive 18% return.
And then while many entered 2021 feeling good and optimistic, it's possible that they weren't optimistic enough. The S&P 500 returned a positive 27% last year in 2021 and closed at a record high 70 times. That's 7-0, a record high 70 times last year.
It also beat both the Dow and the Nasdaq by the widest margin in 24 years. In fact, it's only the sixth time in history that the S&P 500 beat the Dow and the Nasdaq in a single year. The previous five times were in 84, 89, 97, 04, and 05.
As mentioned at the top of the show, the market tends to surprise the majority of people, but we can learn a lot from these unexpected events and use them to make better, more informed decisions as retirement investors.
More specifically, yesterday I shared three things that we can take away from the last three years. Number one, like a doctor, it's critical to diagnose before prescribing. And we can say the same thing about financial planning. A prudent investment portfolio, i.e. your prescription, needs to be supported by a comprehensive financial plan, i.e. your diagnosis.
As I've said numerous times on this show, your investments should not change unless your investment policy statement changes. And your investment policy statement shouldn't change unless your financial plan changes. Number two, to be a successful investor, we have to exercise both patience and discipline. Reacting to markets, making emotional, sometimes irrational decisions with our money, and neglecting to take a long-term approach can be wildly damaging to our retirement plans.
And then finally, number three, we don't need a crystal ball to tell us exactly what the future holds in order to accomplish our financial or retirement goals. Most investors didn't know what 08, 09 had in store for them. But for those that had a sound financial plan exercised
patience and discipline and avoided making costly, irrational decisions with their money, their financial goals remained largely on track. And the same can be said about the bear market in August of 2011. Nobody saw that coming. And again, in December of 2018, and even more dramatically in March of 2020. Now, while we don't need a crystal ball in order to achieve and accomplish our retirement goals,
and I think you should largely ignore most of the pundits who are going to be making their rounds in the next month pretending that they have one, I do think that there's value in paying attention to stock market forecasts and predictions. Let me try to explain here.
The foundation of being a good investor remains relatively unchanged. For me personally, that foundation is essentially made up of four basic rules. Number one, mitigate fees and taxes. Number two, diversify. Number three, discipline and patience. And number four, apply academic principles.
So while that foundation hasn't required any changes for the last 100 years and will remain relatively unchanged going forward, we can't always say the same thing about the financial and economic environment. And the current environment drives a lot of our assumptions and decisions about the future. For example, the 10-year treasury is currently yielding about 1.6%.
Since the current yield of a bond is a good predictor of its future return, it wouldn't be wise of us to expect a 5% or 6% annual return from our investment-grade bond portfolio.
Jack Bogle, the founder of Vanguard, has a great quote that says, "Treat history with the respect it deserves, neither too much nor too little." So while we can use history and historical data to help us make informed investment decisions about the future, we have to be thoughtful and intentional about how we use that information. We can't always assume that history will repeat itself.
And sometimes in the case of our bond portfolios, let's say, it's quite evident that the next 10 years for the bond world will most certainly not look like the past 10 years. Now, forecasts and predictions about the investment grade bond market are certainly easier than the stock market. Much of the bond market comes down to simple math, but the stock market, as we all know, can have a mind of its own.
That said, forecasting and setting reasonable, intelligent expectations about the future performance of our stock portfolio when we're making investment and retirement decisions is still an important piece of financial planning. As Vanguard puts it, a good forecast objectively considers the broadest range of possible outcomes.
clearly accounts for uncertainty and complements a rigorous framework that allows for our views to be updated as the facts bear out.
In case you're wondering, Vanguard does in fact regularly publish market forecasts and they've actually maintained a good track record, mostly because they take an intelligent, thoughtful approach and follow a rigorous framework. They don't put their finger in the air and decide that the stock market is just going to be up 10% this year. They use the information and data that we have available to us today to generate a range of potential outcomes across different asset classes in the future.
Not all that different from a Monte Carlo analysis where my friend Michael Kitsis quotes Keynes by saying, I'd rather be vaguely right than precisely wrong. And that's the approach that Vanguard and many others have taken with their market forecasts. So while many advisors, including yours truly, will largely tell you to run screaming from market forecasts and predictions, especially during this time of the year, I thought it was an appropriate time to to
clear the air a little bit and acknowledge that forecasts do serve a purpose. Forecasts that are done with academic rigor and are applied properly to help set reasonable expectations, not to make a quick buck or get more eyeballs and clicks. So with that, here are some of Vanguard's forecasts about the next 10 years. First, they said lower returns based on today's ultra low interest rates and elevated stock market valuations.
More specifically, they expect international stocks to strongly outpace U.S. stocks in the neighborhood of three percentage points per year for the next 10 years. And then as previously shared on the podcast, they also expect U.S. value stocks to outpace growth stocks by about 4% per year. And then finally, and not so surprisingly, they expect an interest rate hike in late 2022 and inflation to stay above 2%.
If you're interested, I'll link to their recent forecast as well as more details around their forecasting methodology in the show notes, which can again be found by going to youstaywealthy.com forward slash 138.
While much of what I've talked about up to this point is on the optimistic side of things, I think we do have to acknowledge that we'll most certainly see some rough years ahead. For one, the stock market on average, as you guys likely know, I've mentioned this before, the stock market on average ends the year in positive territory three out of every four years at 75% of the time.
Four years ago, that was 2018, was the last time we saw red in U.S. stocks when they finished the year down 6%. Prior to that, in 2015, U.S. stocks were down about 0.73%.
And then, of course, we had 2008 before that with U.S. stocks down almost 40%. So for the last 14 years, the U.S. stock market was in positive territory about 80% of the time. That's slightly above its long-term historical average. Given that, in addition to low interest rates, inflation surprises, supply chain issues, etc., it wouldn't be entirely surprising to see U.S. stocks get challenged this year or next or sometime in the next five years or so.
While many investors will and should view any sort of pullback as an opportunity, if retirement or a major life event is around the corner, now would be a prudent time to ensure that you're invested properly while the market is healthy. And that comment truly doesn't have anything to do about predicting the future. The financial plan changing, i.e. retirement around the corner, is the driving force behind any sort of investment change.
And just since the market is coming off another positive year, it more easily allows for those changes to be made because when, not if, the market drops 20 plus percent, the only change you'll likely be able to make is to move your retirement date, find a way to decrease your expenses or some combination of the two. Selling your investments at a loss to begin funding retirement and or making major allocation changes in a bear market is likely not going to be the prudent move.
In summary, while I will warn all of you and most investors to ignore market predictions and the pundits who are going to pretend to have a crystal ball so that they can get more eyeballs or sell more books or sell more advertising, I do believe that there's a place for thoughtful analysis and forecasts. We can use sound forecasting to set reasonable expectations
Thank you so much for joining us.
As always, if you have any comments, questions, or feedback, or you just want to say hi, you can send me an email at podcast at youstaywealthy.com. That's podcast at youstaywealthy.com. I read and respond to every message, so please don't hesitate, shoot me a message. And to grab the show notes for today's episode, head over to youstaywealthy.com forward slash 138. Thank
Thank you, as always, for listening, and I will see you back here next week.
