What If The Good Times In The Stock Market Are Over?

stock market returns

Heading into this year, there has been a lot of skepticism about the prospects for equity returns going forward.

On one hand, we’ve all heard this story before.

Over the past decade, pretty much everyone has hummed the “market is overvalued” tune at some point – all while the S&P has continued its relentless march upwards.

On the other hand, it makes total sense.

Long-term stock market returns are somewhere around 8-10%.  Since 2010, the S&P has delivered an annualized return of about 15%.

It would be silly to assume we will keep seeing this kind of performance ad infinitum.

And if I was a betting man, I’d probably side with Vanguard’s take on future returns below instead of assuming the bull run will continue in perpetuity:

Nominal Future Returns

Vanguard forecastsSource: Vanguard

That being said, there’s no need to give up your dreams of financial independence just because the returns may be lower for the next year (or ten).

Below are some thoughts on optimizing your wealth-building strategy in an era of below-average market returns.

Back To Basics

Remember – there are three fundamental levers you can pull in order to compound your net worth in the stock market.

To begin with, there’s the amount of money you are putting to work.

Then, there is the return you generate on those investments (how hard that money works).

Finally, there’s the amount of time you let those investments compound (how long that money works).

There isn’t much you can do to influence market returns.  They are what they are (and right now, they are mighty frustrating!)

You can, however, play with the other two variables.

One option is to increase the amount of money you are putting aside.  To do this, you can either increase your savings rate or increase your earnings.

Assuming you’ve got your budget under reasonable control, increasing your savings rate may be a tough ask.  This is especially true when prices are rising 5-10% a year.

The good news is that this higher inflation is playing out against the backdrop of a pretty robust job market, which makes it much easier to negotiate a raise or find a better paid job.

If you can save 50% – 75% of every incremental dollar you make, you’ll not only juice your savings rate, but will have some extra money left over to spend on whatever your heart desires.

In other words, it’s a win-win.

As an aside, there’s a special mention here for ANY kind of consumer debt.

Financing a car or a holiday at 15% is a BAD idea to begin with.  Doing so when the equity market is returning 3% a year is like playing Russian roulette with a fully loaded revolver.

Please don’t.   And if you’ve done it already, do the best you can to pay it off as quickly as possible.

Max Out Tax-Advantaged Accounts

While I think returns may be lower for a while, I don’t subscribe to the notion of a permanent reduction.

That being said, many people do.

If you’re in that camp, the natural consequence is to channel most, if not all, contributions into your tax-advantaged accounts like workplace pensions and 401(k)s.

In a world of 8-10% returns, you can probably afford to forgo some of the employer match, putting money aside into your GIAs (general investment accounts) instead.

But if you think we live in an era of 3-4% returns, you can hardly afford to pass up on the opportunity to double or triple your money on the spot:

Pension wealth boost

Re-evaluate Real Estate vs. Stock Market

One reason I am such a big fan of real estate is its ability to deliver higher long-term returns as compared to equities.

Yes, it’s not apples and oranges.

Real estate is usually more hands-on, even if you have a great property manager.

Ideally, you also want to own a reasonably sized portfolio of properties in order to diversify away your risk.

But in return, you can get 10-15% annual returns – and that’s before any home runs.

It might not seem like much – but those few incremental points of return make a tremendous difference over the years:

Various Returns

And, of course, the bifurcation becomes even starker if the markets were to return 4% instead of 8% going forward.

As I’ve mentioned before, property isn’t for everyone.  That being said, it’s a great way to build wealth – and your returns are largely uncorrelated with the equity markets.

Reconsider Investing vs Mortgage Repayment

The other decision you may want to reconsider is how quickly you repay your mortgage.

On the surface of it, it’s a straightforward one.

If you expect equities to return 8% while your mortgage carries an interest rate of 2%, investing will always leave you financially (if not psychologically) better off.

When expected long-term stock market returns decline, that math gets fuzzier, thanks to factors like taxes (both on investment and regular income), asset allocations, early retirement aspirations, views on SWRs and so on.

However, even if future market returns are significantly lower vs history, that doesn’t necessarily make early mortgage repayment the preferred option.

The reason, once again, is inflation.

Right now, we live in a world where inflation runs at 5%+ per year.  At the same time, you can lock in a long-term mortgage for significantly less than that.

In the US, you can get a 30-year fixed rate for just over 3% at the moment (do note the recent increase):

Bankrate Mortgage Rates

Source: Bankrate

In the UK, 30-year mortgages don’t yet exist (though that might soon change).  However, you can lock in a fixed rate of just 2% for the next 10 years.

And in Continental Europe, I’ve heard of people taking out 20-year fixed rate mortgages for about 1.5%.

Now, I don’t know where inflation will be over the next decade – or three.

But if you think current levels of inflation will persist, borrowing money at 3% to finance an asset that will grow at least 5% (as real estate typically tracks inflation) is basically finance 101.

Alternative Income Streams

Lower equity returns can also change the thinking around alternative income streams.

Let’s say you could take on a part-time job that pays $500 a month.

One option is to invest that money in a nicely diversified, low-cost index.  Do that for long enough, and magic will happen.

But what if you don’t have a 40-year runway?  What if you only have 10-15 years left in the workforce – and you expect the returns to be subpar during that time period?

Well, one way to approach it is to consider that your equity investments will work for you long after retirement.  It’s not like you’ll sell all of your equities the day you pull the plug.

Equally, you may be better off utilizing your time and money to build up a side income stream.

Being able to generate $500 – $1,000 a month in incremental income may not sound like much.

But assuming a 3% SWR, that $1k a month has a headline value of $400k.

And at a 2% SWR, the value goes up $600k.

Something to ponder.

Doubling Down

Finally – and provided you’ve got a long enough time horizon – you may well choose to double down on the market.

The early retirees of today are the ones who kept buying equities back in the 2000s – one of the worst decades ever to be an investor.

Those who stayed the course through the dot-com crash AND the GFC were subsequently rewarded with the mother of all bull markets.

For all we know, the early retirement class of 2040 may well be matriculating today – but only if you keep the faith.

As always, thank you for reading – and happy investing.


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15 thoughts on “What If The Good Times In The Stock Market Are Over?”

  1. Great stuff (as usual) BoF;
    And while I do agree with the sentiment of lower S&P returns forecasted (as Vanguard pointed out); I do dislike the fact that most UK/Euro based finance bloggers tend to focus solely on the S&P also.

    While the US equity market is expected to return 2-4% returns (annualized) over the next 10 years; Vanguard (the same benchmark) is also expecting the UK to outperform at 5.6% (median, annualized) returns.
    So, having a global, market-cap weighted, diversified fund, as most UK/Euro investors do, might have less reason to worry as the S&P is <50% of their portfolio (with all American equities being ~60%).

    And when you bring into the mix the LifeStrategy series of funds from Vanguard, which over-weight their home countries (for UK and EU respectively), this is even less of a concern as US equities make up <50% of their fund anyways. 🙂

    Don't disagree with any of what you've said above, but a more holistic (global) approach is always appreciated! 🙂

    Source for UK returns: https://www.vanguard.co.uk/content/dam/intl/europe/documents/en/gbp-vanguard-economic-and-market-outlook-2022.pdf

    1. Thanks Jack

      I think your comment is spot on. I certainly have a strong, explicit, and well-documented bias for US equities which impacts my vantage point.

      That being said, and once again it’s probably due to my bias, I just really struggle to articulate a case for putting a big chunk of my money into UK equities. Perhaps 10%, roughly equal to the proportion within the global index, but not much more than that.

      Others may be more comfortable but for me it just veers way too far into active investing territory…

      1. Ah, I was not aware of your strong US bias, I can read below that you’re 100% in US equities; And this has me wondering, either you have a very strong conviction in your investment strategies, OR know something I do not 😉

        Either way, to each their own, and I could not get myself to be strongly US focused (though the biggest US companies get their $$$ from the rest of the world anyways).

        And I also agree re heavy-UK equities, this is why I do not touch the LifeStratgy series of funds, and stick to the FTSE Global All cap fund. Having said that, it merits a thought when the world’s second largest asset manager says that *maybe* the UK may outperform the world in the coming decade.

        Re your thoughts on veering into active investing, purely for the sake of discussion, one could also say that the S&P500 is an active index, with it’s index committee your acting as the ‘fund managers’.
        In the explicit case of Tesla for example, they did not include Tesla at #500 and work it’s way up, but rather only included it recently and it immediately took up the #5 spot (when included in the index) – though this may have more to do with the S&P rules than purely market cap weighting (I’m unsure of how the S&P index is calculated/computed).

        Anyways, perhaps the discussion above warrants the case for a UK based globally invested blogger, if there is a space in the ‘market’ for that 😉

        Always a pleasure reading your work and knowing your thoughts regardless BoF. 🙂

    1. A step in the right direction for sure

      Then again, the UK government doesn’t really back the mortgages in the same way Fannie Mae and Freddie Mac do in the US, so not surprising it has taken longer.

  2. Hi BoF,

    Just out of curiosity, did you change your regular allocations (DCA) to the stock market? Are you putting in less (and maybe shifting more capital to RE) in light of the lower expected returns in the future?

    I’m finding it difficult how to approach this. Vanguard’s expectations make sense, as the market has just returned way too much the past 10 years (so it is indeed not logical to expect the normal 8-10% returns), but who knows….we may be in this market for another 10-15 years.

    On another note, are you still investing in the S&P500 or are you shifting to a global index tracker to catch the outperformance of non-US stocks?

    1. I’m still 100% US equities. I know it might expose me to a stretch of lower returns given recent outperformance.

      That being said, I still think that over the long run (40+ years), US equities will trump other indices by a wide margin.

      No change to DCA though I’m about to buy £80k worth of indices by utilising some cash in our ISAs, so I guess you can say I’m topping up.

      And still in the market for another property this year, though haven’t found anything suitable so far.

  3. I agree that exposure to global markets is important and often understated in the PF community. While I do not hold a global equally weighted portfolio, I do hold international stocks within the 20-30% range, which history has shown leads to optimum returns. However, there is no guarantee that is going to hold true in the future. But I am comfortable with it.

    1. The best strategy isn’t the one with the highest expected return, it’s the one you can stick to through thick and thin!

      Sounds like you’ve found the right balance there.

  4. Great article. Your line “If you can save 50% – 75% of every incremental dollar you make” is a stark reminder that this whole FIRE business pretty much relies on you being a high earner. I would bet saving 50-75% of earnings is out of reach for the majority.

    1. Yeah very much so, though I don’t cease to be impressed by the folks who get there on average or below-average incomes.

      As far as your comment on my US bias, it’s an interesting one. Having spent many years in the US, I just think there’s a combination of factors like employer-friendly labor laws, very deep and liquid markets, risk appetite, availability of capital etc that gives US companies an edge vs. global competitors.

      Then again, I may well be wrong (and most likely will be wrong over the next decade)

  5. “The good news is that this higher inflation is playing out against the backdrop of a pretty robust job market, which makes it much easier to negotiate a raise or find a better paid job.” – This is a good point. I have seen colleagues of mine change jobs for a 50% increase in salary. I work in software. Having said that, I am not sure other industries have fared so well. I know a printer who is changing jobs due to location, but is actually taking a slight pay cut.

    1. Yes, agreed.

      But… also a good time to switch to a higher-paying industry. I hear some IT companies are so short-staffed they will hire and re-train people from all sorts of backgrounds.

  6. It’s not likely to be a steady linear growth of 2-3% though is it. It’s going greater growth than that punctuated with some scary corrections/crashes. So I think DCA and double down is the way forward.

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