The past year has been a wild ride for the stock market, delivering a strong performance that boosted retirement accounts and brought smiles to investors. However, after the excitement of 2023, it’s essential to remain grounded. The long-term trend in the stock market is indeed upward, but history has shown that setbacks can happen—and it’s wise to prepare for the ups and downs that may lie ahead.

A Look Back: The Good and the Bad

Despite the impressive gains of 2023, most stock investors are only modestly ahead since the beginning of 2022. If dividends are included, the S&P 500 returned a modest 3.42% over the past two years, which, unfortunately, hasn’t kept up with inflation. It helps to remember that 2022 was particularly brutal for investors. That year saw simultaneous declines in both the stock and bond markets, with bond prices dropping as interest rates spiked—conditions that echoed the market collapses of 2008. Fortunately, 2023 was a brighter story. Stocks and bonds rallied, supported by investor optimism and hopes that the U.S. economy would avoid a recession and that the Federal Reserve would lower interest rates soon. This momentum in the last quarter helped lift stocks, delivering annual gains that are now being reflected in millions of workplace retirement accounts.

For instance, the S&P 500 returned 11.7% with dividends included, while broader U.S. stock indices, like the Russell 3000, followed with similarly strong performances. Internationally, many markets also did well, although most actively managed funds couldn’t quite match these benchmarks. The average U.S. stock mutual fund and ETF returned around 20.3% for 2023—remarkable, but generally lower than broad market indices, highlighting the long-standing debate in favor of low-cost index funds over actively managed options.

What Lies Ahead?

After a bumper year, investors are understandably curious (and perhaps nervous) about what’s next. Many factors are at play: interest rates, inflation, and the health of the economy all drive stock and bond performance. History shows that markets often revert to their long-term averages, so the ups and downs we’ve experienced may just be part of a bigger pattern.

In the long view, the average annual return for the S&P 500 since 1926 has been about 10.4%, meaning the stock market typically doubles in value every seven years or so. While nothing in the stock market is ever guaranteed, a diversified, buy-and-hold strategy has historically rewarded patient investors who can weather the inevitable fluctuations. But if you’re nearing retirement, a more conservative approach may be better suited to lock in returns at current interest rates.

Embracing Both Calm and Chaos

For now, let’s enjoy the moment, as the market seems to be providing a welcomed calm after 2022’s turmoil. But as any seasoned investor knows, the calm doesn’t last forever. It’s essential to remain prudent, setting up your portfolio so that it can withstand the inevitable market shocks. After all, the strength of a long-term investor lies in their ability to weather both the storms and the sunshine that define the market journey.

Sources: Sommer, Jeff. “After a Rip-Roaring 2023, the Markets Are Taking a Breather.” Nytimes.com, The New York Times, 13 Jan. 2024, http://www.nytimes.com/2024/01/13/business/after-a-rip-roaring-2023-the-markets-are-taking-a-breather.html. Accessed 1 Nov. 2024.