As I began to write my State of the Union address for 2025, I quickly went to my note from 2024.
If you may recall, my message was, “Don’t get distracted. Hold tight to your financial plan.”
It comes to no surprise to you that we have benefitted from our long-held belief that the most efficient and effortless way to build wealth is by investing in a low-cost diversified portfolio of enduring companies that have weathered the ups and downs of the market.
We have been rewarded for this belief.
As I wrote this note, the S&P 500 Index which is no more than a proxy for the U.S. Stock Market has posted back-to-back 20%+ annualized returns in 2023 and 2024.
In fact, over the past 15 years, the U.S. Stock Market has compounded at approximately 15% annually (an astounding accomplishment).
We have entered a euphoric period of investing while a newcomer might believe that a diversified portfolio only goes up.
Doing some quick research, we must go all the way back to November 2023 since we have had a 10% drop in the U.S. Stock Market. Which brings me to…
The Cost of Admission
- We should plan for a 15% drop in our diversified portfolio of companies annually.
- We should plan for a 30% or greater drop in our diversified portfolio of companies every 5 years.
- The historical long-term trendline return for these enduring companies is approximately 10% year.
Important Planning Nuggets
- While the trendline return may be 10%, returns rarely fall around 10%. Returns are lumpy.
- For financial planning purposes, we utilize a historic return of 7.8%. 7.8% tends to be the worst historical 30-year rolling return period for the S&P 500 Index.
At Know My Plan, we believe that markets cannot be timed nor consistently forecast. You earn the long-term return by being invested in good times and bad times.
I would also like to share that we are optimistic by nature and believe that the companies we own will continue to innovate and solve whatever problems we face next.
We believe that by owning companies we have aligned our best interests together and these companies will steward their capital towards profitable endeavors thereby benefitting us all.
Do not be lulled to sleep, volatility is normal.
When we least expect it, the market will drop. Fear will emerge. People will scream, “this time it’s different.”
I calmly remind my Know My Plan Financial Planning clients; we have already prepared for this.
- All the money you need from your portfolio over the next 5 years is not in the stock market.
- You have a robust cash emergency fund.
- If you have equity in your home, you have been encouraged to get a home equity line of credit
- You have appropriate insurance coverages in place.
Whatever the next apocalypse de jour is, this too shall pass.
I shall repeat my message from 2024 merely for effect, “Don’t get distracted. Hold tight to your financial plan.”
Stay disciplined. Work the plan.
If you or someone you’re close to is a high-achieving professional that could use help aligning their finances and establishing a financial plan, please reach out to us, we’re accepting new clients and eager to help.
–Nic
