The Most Important Retirement Chart You'll Ever See

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There are plenty of important charts for investors, but there’s one very powerful one that demonstrates the most principles for retirement planning. If you interpret this chart correctly, then you’ll understand the foundation of portfolio allocation theory. You’ll be in great shape if you combine that knowledge with some discipline to build an investment strategy.

Returns across different lengths of time

This chart displays the percentage frequency of positive returns across various rolling periods throughout stock market history.

Image source: Fisher Investments.

The chart indicates that in roughly 70% of instances, the stock market rose over any given four-month period. That frequency rises to 80% for two-year windows and 90% for six-year windows. This general upward trend continues all the way out to 16 years, beyond which the stock market has never delivered a net loss.

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We can conclude that equities are a safer bet for growth over long periods, while shorter periods are less predictable. Over a long enough time frame, there’s no historical precedent for negative returns. That might seem like a simple observation, but it has major implications for retirement investing strategies and portfolio construction.

Image source: Getty Images.

What’s causing this pattern?

Past trends and performance aren’t necessarily indicative of future results, but it’s important to think about the forces that have driven returns throughout history. It’s not a matter of coincidence that the chart takes its shape.

Think about the forces that determine how much a company is worth. A stock’s value reflects the amount that people are willing to pay for it at any given time — that’s basic supply and demand. In turn, supply and demand are influenced by capital market conditions in the macroeconomy, along with the cash flows that investors expect a company to produce.

If a business is going to generate more profits than expected, then that business is worth more to shareholders who can receive those profits. Stock prices are also driven higher by things like interest rates, inflation expectations, and investor risk appetite.

As a result, there’s a distinction between short-term and long-term drivers of stock values. The market as a whole should grow along with the global economy. Employers hiring, consumers spending, and entrepreneurs innovating all lead to increased economic activity. This raises the amount of cash flow produced by businesses, and it eventually translates to higher stock prices.

Things can absolutely get disrupted in the short term — just look at the Great Financial Crisis, the dot-com bubble, or the COVID-19 pandemic. However, the global economy has a repeated tendency to keep chugging if we give it enough time.

What does this mean for retirement planning?

This tells us a ton about growth and volatility, which is necessary information if you want to build a successful retirement portfolio.

History tells us that volatility isn’t a considerable risk over periods that are 15 years or longer. If you have a long time horizon — and the discipline to stay invested during market downturns — then you can confidently invest for growth. A diverse portfolio with heavy exposure to stable growth stocks is a powerful tool for younger people investing in a 401(k) or IRA.

On the other hand, negative returns are fairly common for shorter time frames. Sometimes those losses can be really steep. All sorts of strange and unpredictable events have triggered corrections and crashes throughout history. Investors with shorter time horizons can’t necessarily afford to withstand losses. If you’re less than 15 years away from retirement, you need to take steps to protect your investment portfolio. As you move into your 50s, it’s time to start locking in some gains and increasing exposure to bonds, dividend stocks, and other lower-volatility asset classes.

If you follow this formula, you’ll drastically improve your shot at responsible long-term gains — and reduce the risk you’ll lose those gains in a market downturn.

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