Ask Ric: The Recent Sell-Off and What’s Next for the Market

Ric’s Take on Resetting Expectations and Planning for the Next 10, 20, or 30 Years

Ric Edelman: Let's go to the phones here on The Truth About Your Future. We head off to Phoenix. John B is with us on the air. How are you doing, John?

John B from Phoenix: Well, good, Ric. Thank you.

Ric: What can I do to help you?

John: I wanted to get your perspective on the stock market, like the Dow Jones. I wanted to ask you, now that we've had a pretty good sell off in the market, we're probably in a bear market. Curious what you think going forward.

Ric: Well, let me give you the numbers, John. Short-term, meaning the next few years, even to the end of the decade and then long-term, 20, 30 years from now. First of all, we are in the midst of a very bad bear market, a very bad economic environment. We all know what's going on. We've got the pandemic still lingering. We've got the war - Putin against Ukraine. We've got rising interest rates, rising inflation rates. We've got supply chain shortages. There's an election coming up in November that has people on edge. There's an awful lot of headwinds that we are facing, and this is why the stock market and the bond market have been down so dramatically. Many fear that real estate is in a bubble and it too is going to crash. So a lot of folks are expecting that 2022 is already a terrible year and it's going to end badly as well. So whether we have hit bottom or not, we'll have to wait and see. Personally, I don't think we have, but that isn't really very important, is it, looking at six months or a year? So what? That's not why we invested. We didn't invest with the intention of selling after only a few weeks or months or a year or so. We're investing for the long-term. So most folks are saying on Wall Street right now that the rest of the decade, the stock market and the bond market is not going to do as well as it has done historically, certainly not nearly as well as it has done in the past 10 years.

Curbing Our Enthusiasm for Stellar Returns Every Years

Ric: But the past 10 years have been fabulous for the financial markets. So the fact that the next seven or eight years won't be as good as the last 10, well, you know, that's all a relative comment. So we need to temper our enthusiasm. We need to reset our expectations. What really matters is the very long-term, 10, 20, 30 years out. That's what you need to have when you're investing is a very long-term perspective. And I have said very often that the Dow is no doubt in 20 years going to hit not just 50,000 or 100,000. I think it's very likely that Dow is going to hit 150,000 in 20 or 30 years. Now, let's just understand why I say that. I'm not being Pollyanna about it. I'm very concerned about what's going on in the world right now. And as I mentioned, I think things are going to get worse before they get better for all the reasons we know so well - what's going on in the economy, not just in the US but globally. But let's look longer term. The numbers are, since 1926, the stock market has averaged 10% per year. That's an average. It never actually earned 10% in any given year. Some years a lot better. Like last year, the stock market was up 26% and other years it's crashed. It has, you know, lost a lot of money, but on average, 10% a year.

The Rule of 72 in Financial Planning

Now, if you are familiar with the rule of 72, you ever heard of that, John?

John: Yes, I have.

Ric: So this is a good way to get a quick snapshot of how long it takes money to double. You take whatever number you got, you divide it into 72 and that's your answer. In other words, if we are looking at a stock market earning 10% per year on average with the rule of 72, that means that it takes 7.2 years for the stock market to double. Well, let's just take a look at that. Over a 20 year period at seven years to double, they're going to be three doublings roughly. Right? You divide seven into 20. You know, seven times three is 21. So back of the envelope, quick set of math. You're going to have roughly three doublings in a 20 year period. Right now, the Dow is around 30,000. One doubling takes it to 60,000. A second doubling takes it to 120,000. A third doubling takes it to 240,000 in 20 years. Pretty exciting. Now, that's assuming the stock market over the next 20 years does what it did for the past 100 years, meaning 10% a year. What if the market isn't that good? What if the market only does 7% a year? That means it'll double in 10 years instead of seven, which means over a 20 year period it will double twice instead of three times.

Well, instead of having 240,000 on the Dow, you have 120,000 on the Dow. I'll take either one. They're both pretty exciting. Fantastic numbers. As bad as things are looking right now, as pessimistic as it is easy to be right now. If you stay focused on the long-term, you have to regard that right now is a heck of a buying opportunity and you're either going to invest or you're going to wish that you had.

John: That's true.

Ric: Thank you, John. I really appreciate the phone call very much. That was John B from Phoenix. You can do what John did. If you've got a question for me, just send it to me to AskRic@thetruthayf.com.