For two years in a row, large-capitalization US stocks, particularly stocks and indices tilted towards growth like the NASDAQ and the S&P 500, have had strong returns. The average return for the S&P 500 over many decades is around 10%. In 2023, the S&P 500 was up 26% and in 2024 it was up 25%. Using simple math and ignoring the positive impact of compounding, the S&P 500 index has more than doubled its long-term average return in the past two years. Unfortunately, few other asset categories have had this outpaced positive performance trend. I will include a list of asset categories, and their 2024 returns below. All this means is that most diversified investors have not done as well as the two indexes above. However, that is not a terrible thing for you or me and let me try to explain why.
I started my first real job out of college in 1984. It has taken me forty years of work, discipline and good fortune to accumulate some wealth. I have been privileged to meet so many of you over the years that I can say with confidence that most Bill Few clients have had an experience similar to mine. Get a job, build a family, save and wait. Then one day, in the blink of an eye, forty years have passed by, and you own your home, have no significant bills and have accumulated some savings. Our goals today may be quite different from the young. The young want to get rich; the old do not want to get poor! I certainly want my investments to do well, but I want to make sure that what I have accumulated over forty years will comfortably support me for the final 2-3 decades, hopefully, if my health permits. Part of the difference between the views of the young and old explains some of the differences we have seen in investment performance in the past two years.
I read a good article talking about how many younger (mainly male) investors have been very aggressive, buying just a handful of stocks and crypto, trying to amass small fortunes and earn an outsized performance boost by owning just a few assets. Diversification is what their parents or grandparents do. They go all in and put 70% or more of all their wealth in one hot asset, many using leveraged ETFs (Exchange Traded Funds) that will provide two to three times the daily exposure to these already hot, volatile investments. Why are they this aggressive with their money? There are probably many reasons but let me give you two. The last major stock market correction was 2008-2009. A young 24-year-old in their first job, and likely saving close to zero, would be 40 now. These aggressive investors may have never lost significant money…yet. Investors in their 20s up until 40 have been in a great bull market that has substantially rewarded their aggressive behavior. Certainly, a few have been stung and lost money, but the recent history is being written by the winners and they brag on the net and social media to make sure you know that they have found the secret to getting rich fast. Then they encourage their peers on social media to do the same. The second reason young investors are aggressive is because it is better to risk it all when you are young so that you have time to recover if it goes wrong. Let’s go way back and think about the California Gold Rush in 1849. If you had a small, prosperous farm in PA and you were 50 years old with a nice family, not even the lure of gold and riches would get you to trade your current wealth for a gamble to get rich thousands of miles away. However, if on the farm next door an unsuccessful farmer had a bunch of kids and one of those young kids barely out of high school had no great prospects locally, why not head west and hopefully make your fortune. It could be that you get rich, but even if you don’t, are you any worse off than if you stayed on the unsuccessful farm?
RELATED: Read how 401(k) changes in 2025 can impact your retirement savings.
I am sure we all would like to see our wealth up 50% in the past two years. Mine was not and most of yours was not either. Our goals are very different, and we aren’t comfortable having 100% of our investments in the S&P 500 index. We have seen the stock market fall hard in 1987, 2002, 2008 and even as recently as 2022. To maintain our wealth, we diversify and spread our eggs over many baskets. They may not all go up at the same time, but that means that they should not all fall together either. I am not rooting against the young folks; I have six kids that are now in their 20s and 30s. Thankfully, they listen to me and if they do save, they do so prudently and they are getting rich slowly like most of us (although there might be a hidden crypto account they have not told me about).
I have purposefully not mentioned some of the craziest investments that have roared forward this year because I do not want to give them anymore press or have you seduced by the siren song of outsized returns. I have been a professional investor for forty years. There is no stock, ETF or crypto that I would invest 70% plus of my lifetime earnings. Your Bill Few advisor matches your goals and objectives to your portfolio in a similar way. Call me old-fashioned, but I have enjoyed getting rich slowly and I think I will err on the side of caution. I am getting too old to start all over again. Please see a broad list of asset category returns for 2024 below. Stay diversified and stay prosperous in 2025. Happy New Year!
Mike Kauffelt, CFA
Data Source: Morningstar
