Ten Years Later...

I (Sean) am a bit fastidious by nature and keep my inbox neatly categorized. After finding the relevant email folder I confirmed my first day in this business – “Basics Day” training at the large firm I started with out of college – was May 29, 2015, about three weeks after receiving my undergraduate degree now ten years ago as of this writing. Most of my newly minted baccalaureate friends were gearing up for a summer off before graduate school (Vandy students, always eager to go back to school). A group of my closest buddies tried to convince me to join them on the obligatory post-grad Europe trip. But I was ready to get to work. I remember donning what was then the finance uniform that May morning in 2015 – white shirt, dark suit, conservative tie. Previously I dressed that way once a year for our fraternity formal, now it was a suit and tie five days a week. What a difference a short walk across a stage to receive a piece of paper makes…*

Now I’ve completed the first decade of my career. Looking back, I had no idea what I was getting into. Those ten years have been distinguished by three phases, each characterized by a question. The first three years I was clueless, simply trying to survive. The question then was, what do my mentors and peers – all of whom work for and have been trained by the same big firm – believe as it relates to this business? (Followed by, how am I going to afford rent and groceries next month?) The next three years my thinking began to broaden. The question became what do people outside of the organization I fell into out of college believe? What other philosophies and approaches exist elsewhere in the industry? The last four years have been guided by the ultimate question: what do I believe? It is no accident during those last four I left the big firm to establish my own along with my partner, Rory. At 32 years old and assuming the continued blessings of good health, I should have at least forty years left. I will be disappointed if my career does not reach the semicentennial mark. I am 20% of the way there.

So I have 80% of my career ahead of me to focus on the clients currently on our roster at Resolute Wealth Management and those who will be added. We do not take lightly the addition of new families. Rory and I are bound by the immutable limitations of time, that precious resource we can manufacture no more of. Every new family we bring on is a future new family we will not have the resources to serve (this is why we typically only add clients who are directly referred by existing clients – we work with people we like and trust them to connect us with people we will enjoy working with for decades). We envision each family we work with will rely on us up to and through death, as a financial plan is not complete until the legacy goals that outlive a couple have been fulfilled. Thus, the financial plans we construct and the assets we manage have multi-decade time horizons. We are not investing for five years; we are investing for fifty years (and then some). Given such a long timeline, the only asset class that has proven the ability to compound at rates meaningfully higher than the rate at which prices increase is the ownership of profitable companies. Therefore, most of the portfolios we manage are allocated primarily to equities.

If there is one salient aspect of stocks, it is their volatility. Warren Buffett described the stock market as a mechanism for transferring wealth from the impatient to the patient. Rory and I’s calling is to help families become the patient investors to whom the stock market transfers wealth. The first step is establishing reasonable expectations. Namely, stocks provide a superior long-term return to other assets precisely because they suffer frequent, sometimes quite severe declines. It can be no other way in an efficient market, as any asset that avoided the harsh volatility in equities would be bought up so that its future returns decreased. Since the economy cannot be forecast nor the market consistently timed, the only way to capture the superior long-run return of equities is to patiently ride out those declines.

Given a fifty-year investing time horizon, what should one expect? If history is any guide – and it’s the only one we have – the stock market has given us an average annual drawdown of about 15%, a 20+% bear market drawdown roughly every five years and about three fifty percent crashes every half century.

Let’s consider the investor who began his investing journey after graduating from college in 1970. He is now 77 years old and has been investing for 55 years. Given modern actuarial tables, he likely still has ten investing years remaining, give or take a few. What has today’s 77-year-old investor thus far endured?

Three crashes – a 48% decline in 1973-1974, a 49% drawdown from 2000-2002, and a 57% crash from ’07-09. On top of that, he endured another four bear markets, -27% in 1980, -33% in 1983, -34% in 2020, and -24% in 2022. The -20% figure a drawdown must reach to become a “bear market” is arbitrary, and it should also be noted our friend experienced a drawdown between 19.0 – 19.9% in 1976, 1990, 1998, 2011, and 2018. I can tell you from experience a 19% drawdown feels about the same as a 20% drawdown. If you’re keeping score, that’s five 19% drawdowns in addition to the four official bear markets for nine ~20% drawdowns in addition to the three ~50% crashes already mentioned over a 55-year investing life. Talking about 10% corrections seems quaint given the destructive episodes already catalogued, but our friend will tell you every 10% –18.9% correction was painful (he lived through another 17 of those). The final tally:

So how on earth has our poor, battered friend fared? The following scenario is not representative of reality, in which investors encounter taxes, liquidity needs, and reasons to invest in asset classes other than equities. But for illustrative purposes, here’s the math: $1,000 invested in the S&P 500 on the first day of 1970 has grown to over $64,000. That does not include the reinvestment of dividends (data including dividends pre-1990 is difficult to track down). Had he reinvested all his dividends the total would be substantially higher – roughly double. Now assume he faithfully added $100/month to his portfolio – regardless of the crashes and the bear markets and the corrections – until retirement at the age of 65 in 2013 (total of $52,600 contributions). His portfolio has now grown to…

$1,432,000.

The secret wasn’t avoiding all that harrowing volatility. It was investing straight through it.

Anyone seeing those results finds them unbelievable. But we must not forget why those results are so unbelievable. Equities offer superior long-run returns because they suffer frequent, sometimes very harsh drawdowns. Our friend accumulated a seven-figure portfolio despite meager contributions because he endured three 48+% crashes, nine near or actual bear markets, and seventeen corrections. Each one was brought on for a different reason. Each was accompanied by uncertainty regarding how the future would play out. Turning ~$52,000 into ~$1,432,000 over five decades is not a matter of intelligence, as is often assumed. It is a matter of discipline, endurance, and patience.

We face a similar future together. Assuming a fifty-year timeline, we ought to expect to live through about three ~50% crashes, a bear market roughly every five years, and a correction every year that doesn’t quite become a full-fledged bear. Each one will feel unique for its own reasons.

As mentioned above, I hope I have four decades remaining in this career. That puts my retirement date in 2066. Between now and then we will shepherd our client families through a few 50% drawdowns and numerous bear markets and corrections. We don’t know when they’ll occur. We don’t know why they’ll occur. We don’t know how long they’ll last. But we do know that they will happen. We know they will be gut wrenching. And we will remember and continue to preach those drawdowns are the source of equities’ superior long-run returns.

The S&P 500 currently trades around 6,000. Forty years ago, it traded at 185 (8.8% annualized return since then – not including reinvested dividends). Projecting out the same average level of returns in the equity markets, when I near retirement forty years from now the S&P 500 will be trading around 175,000.

No, that’s not a typo.

Here’s to S&P 175,000. See you there.

Sean Cawley, CFP®

*Also what a difference a virus makes. Goodbye, suit and tie!

Sources:

Yardeni Research, Stock Market Historical Tables: Bull & Bear Markets.

YCharts Scenario Builder

*Disclaimer you cannot invest directly in an index, our investor friend’s actual returns would have varied based on taxes and fees.

Neither asset allocation nor diversification guarantee against investment loss. All investments and investment strategies involve risk, including loss of principal.

Content here is for illustrative and educational purposes only. It is not legal, tax, or individualized financial advice; nor is it a recommendation to buy, sell, or hold any specific security, or engage in any specific trading strategy. Results will vary. Past performance is no indication of future results or success. Market conditions change continuously.

This commentary reflects the personal opinions, viewpoints, and analyses of Resolute Wealth Management. It does not necessarily represent those of RFG Advisory, clients, or employees. This commentary should be regarded as a description of advisory services provided by Resolute Wealth Management or RFG Advisory, or performance returns of any client. The views reflected in the commentary are subject to change at any time without notice.