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By any measure, stock market performance has been pleasing so far in 2023. Large company US stocks have gained about 17.5% as of August 10.

Is 2023 performance too good to be true? Should you be making moves in your portfolio, to prepare for the next, inevitable downturn? After all, some prognosticators claim we’re now “due for a correction” (or worse).

Rather than trying to figure out what will happen next week, next month, or next year, I believe it’s more constructive to view financial markets through a longer-term lens.

Consider the past five years of returns: 2022, when stocks fell 18%, was terrible. Which was preceded by three wonderful performance years: 2021, 2020 (despite the pandemic), and 2019 (+29%, +18%, and +31%, respectively). But stocks struggled in 2018, falling by 4.5%.

The five-year look back on large company US stocks (average annual return) as of August 10, was 11.2%. And the very long term? Large company US stocks returned 11.5% per year, on average, over the previous 94 years.

Bonds, as you might expect, have not only failed to keep pace with stocks (as is usually the case) but have experienced a protracted slump after a period of very low yields, followed by a big jump in interest rates.

The 5-year average annual return for US investment-grade bonds as of August 10 was a paltry 0.6%. Longer term, bonds have returned about 5% on average per year since 1928.

While you’re unlikely to get the long-term average annual return over any one specific 12-month period, the odds of receiving a positive outcome by holding a well-diversified portfolio are stacked in your favor.

The chart below depicts annual returns of a portfolio allocated 60% to stocks and 40% to bonds, going back to 1926 (courtesy of Vanguard). Annual returns are slotted into one of seven buckets, ranging from -20% or worse to +30% or better.

The key take-aways from the chart, regarding 60% stock / 40% bond portfolios are:

  • Annual returns have landed most frequently in the +10% to +20% bucket
  • More than half the time annual returns have exceeded 10%
  • It is rare for a balanced portfolio to experience a year like 2022 (black block) and land in the -10% to -20% bucket
  • If you set your expectations for the long-term annual return from a well-diversified portfolio somewhere in the mid-single digits, you’re unlikely to be disappointed