An Investor's Time Frame Should Weigh Heavily On Expected Returns

I wrote a post a few days ago that highlighted the 10-year annualized returns for the U.S stock market and the MSCI World Index. The summary of the article and the chart was the 10-year annualized market returns remain below their long term averages. A number of our articles are published on SeekingAlpha as was the one just mentioned. One comment to the SeekingAlpha article raised the question that the real returns may display a different result. In short though, the real versus nominal returns, on a ten year time frame, were not vastly different as can be seen in the below chart.

From The Blog of HORAN Capital Advisors

I believe a part of what has investors concerned about the current market at this time is the strength of the market's recovery since the depth of the financial crisis in 2008 and 2009. Additionally, the recent market advance has occurred nearly on an uninterrupted basis, i.e., without a significant correction. The strength of the recent market move is evident in the below chart that looks at the 5 year annualized return for the S&P 500 Index going back to 1926. On this shorter time frame, the rolling 5 year annualized return is far above the average of all the five year returns.

From The Blog of HORAN Capital Advisors

Certainly important economic data released recently raises questions about the sustainability of the current economic recovery. As cliche as it may be, we to believe the weather experienced across the U.S. in the first quarter of 2014 was a major contributor to the weaker GDP report released last week. In the event we are wrong about the weather influence in Q1 reports, as an investor, if you have a longer term time horizon, the 10-year chart would suggest the market is in for further highs on this ten year time frame. For investors with a shorter time horizon, an equity market pullback should not be a surprising occurrence; therefore, a expectations should be set accordingly. To this point though, and as we highlighted in one of our weekend magazine articles by Aswath Damodaran, Ph.D, a Professor of Finance at the Stern School of Business at New York University,he wrote an article about market valuation and concluded market timing can be a difficult endeavor.