PETE THE PLANNER: Decide whether to beat—or be—the market

Dear Pete

The stock market seems to be doing pretty well this year. My friend told me it’s up more than 20%. I’ll obviously take that, but is there a percentage-increase goal I should be hoping for each year? Am I aiming for 10% per year, or should I be happy with 5%? I’m not afraid to take risks, and I’ve got almost 30 years until retirement. Give me a number to shoot for. What do other people get?

–Darren

Didn’t your mother ever tell you comparison is the thief of joy, Darren?

As strange as it sounds, we’re in the midst of a negative 4% sandwich. In 2017, the S&P 500 index rose 21.83%. Last year, the S&P 500 index finished down 4.38%. And as of the writing of this week’s column, the S&P 500 is up roughly 20% year-to-date. It’s magical how a great year can make you forget about a bad year—which oddly made you forget about the great year preceding it.

I’ve always felt a person needs to decide whether his goal is to beat the market or be the market. If your goal is to beat the market, you want to outperform market indexes, ideally net of fees.

In order to beat the market, you are likely going to have to take additional risks and you might even have more expenses in terms of management fees. These two considerations shouldn’t necessarily scare you off. You said you aren’t afraid to take risks, and employing an investment adviser to help manage those additional risks is exactly how people who beat the market beat the market.

Others, including your favorite columnist with “the” in his name, are comfortable simply being the market. This is to suggest I’m quite happy taking exactly what the market gives me and not a dime more. If the market returns 20%, I’ll take it. If it delivers 4%, I’ll take it. And oddly, if it hands me a 10% loss, I’ll take that, too. Taking exactly what the market, specifically the S&P 500, offers you has resulted in an average return of 7.14% over the last 20 years and 9.61% over the last 25 years (the period ending Dec. 31, 2018). This is the epitome of the passive-investing argument. You can do nothing, and still achieve a solid long-term rate of return.

That is until the bear roars again. If you believe markets are cyclical—which by the way, markets are cyclical—then you’ll notice we have not experienced a long-term bear market in quite some time. This isn’t me screaming, “The sky is falling,” but the sky always falls eventually. But don’t panic; it has yet to refuse to rise again.

Active portfolio managers strive to ensure you don’t experience nausea during these dynamic periods of change. You can’t ignore the nuance involved with managing money. In other words, I’ve just oversimplified an investor’s decision point. For instance, maybe you want to match what the market does, yet you want to take substantially less risk. Or maybe you’d like to actively take advantage of market fluctuations of all types. This is precisely why you’d hire an investment adviser.

You asked for a number, though, so I’ll give you a number: 8%. I think you should put yourself in a position to average 8% over a long time. In fact, my personal retirement calculations are based on precisely that average return. Of course, as I approach retirement and the distribution phase of my investing life, I’ll ratchet down my expectations closer to 6%. I am not a conservative investor, but I plan to get slightly more conservative as my beard grays.

Even if you are a more conservative investor (as expressed by the presence of bonds), you can still come close to an 8% long-term rate of return. A portfolio consisting of 60% S&P 500 and 40% Barclay’s U.S. Aggregate Bond Index has returned 6.75% over the last 20 years and 8.38% over the last 25 years. Frankly, I’d take that all day long.

Make sure your portfolio matches your risk tolerance, and more important, decide whether you’re trying to beat the market or be the market. You can always join the 8% club. We have plenty of members.•

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Dunn is CEO of Your Money Line powered by Pete the Planner, an employee-benefit organization focused on solving employees’ financial challenges. Email your financial questions to askpete@petetheplanner.com.