Should Investors Be Worried About the Market's Returns Over the Next Decade?

The stock market has been topsy-turvy lately, but it's still delivered incredible returns for investors over the past decade. As we enter another year of the pandemic and a time in which many retail investors are increasingly focused on highly speculative assets, should long-term investors be concerned about their portfolio returns over the next decade? In this segment of Backstage Pass, recorded on Dec. 13, 2021, Fool contributors Jason Hall and Rachel Warren discuss. 

Jason Hall: What's happened over the past 10 years? The S&P 500; that's this purple mark, has generated over the past 10 years. Is that right? There we go, 365% in total returns. That's an annualized rate of return, guys of 16.6% so almost 17% in annualized total returns.

The past five years, 129% return, annualized 18.3%. Past three years, 23.3%. Almost 31% over the past 12 calendar months.

It's been a great decade to be an investor, there's no getting around that. But again that opening question about the past decade, it has been so good. But then if you start thinking about the market's average returns, is closer to 10%, 8% to 10% on average.

A lot of times when we have a great decade, the period that follows it isn't necessarily as good. You think about where we are, interest rates are still at some of the lowest levels on record.

We've seen economic growth has really snapped back, but there's questions right now with inflation which is our second topic, putting weight on the economy, rising energy prices, all of the issues with supply chain, meeting demand. Is that going to stifle growth? What expectations should investors realistically have over the next 10 years?

There's future market returns and then there's beating the market. What are the market's returns and do investors really have reasonable expectations? This is the question. It's a two-parter for you guys.

Rachel I'm going to ask you to kick it off here. Are you concerned about future returns over the next decade and has this altered your investing approach or your strategy?

Rachel Warren: Yeah. I think it's a great question and it's something that's top of mind for a lot of investors right now as we're heading into a new year and closing out another year of the pandemic. I'm personally not concerned about future market returns, but I think it's realistic to think that we might be seeing some pullback.

History, you know, if we look at the market over the last 50 years or so, history shows us we could be due for another correction sometime in the next few years, but none of us can predict the future. We look at charts and market indicators, but at the end of the day we don't know.

If anything this emphasizes why basing your investment decisions and strategies on trying to time the market can be such a huge mistake and can have such a detrimental impact on your portfolio. I've said this before, but I think trying to time the market it's similar to gambling.

The odds are stacked against you. Only a very few people are going to really be successful at timing the market, and even if they are successful the odds of maintaining that success are even slimmer. To answer your question, I think about it. I'm not concerned.

I think it's reasonable to expect that some of the stocks that make up such a large portion of these indexes like Apple for example, we might see a pullback. I saw an article today on Yahoo! Finance that was saying Apple could be the first company in the world to hit a $3 trillion valuation in that could happen in the near future.

Hall: It makes me terrified when I see those headlines, right?

Warren: [laughs] It's a little overwhelming, and then you think, "OK, so how long can this go on? How much longer can that growth be sustained before you see a pullback?" It's going to be a situation of give and take much like it's been.

For example, when you're talking about a company like Apple, I personally think the company has tremendous runway left as the business grows. This has been proven time and time again, but I also think investors should expect to see a retraction in the market at some point.

I think that that is something that's inevitable, and that's why it's important to invest consistently and to keep that back of mind when you're buying companies, and examining your risk tolerance, and how you want to keep your portfolio balanced. I'm not really changing my strategy of the stocks that I want to buy.

I will say as a final note, I saw an interesting of report that just came out from Morgan Stanley and it was the company's outlook for 2022. "The Great Rebalancing Begins," was what they entitled the report.

Morgan Stanley says:

2022 will be a critical year in which the imbalances wrapped by the pandemic will likely begin to resolve. The economic and market environment in 2022 will be decidedly reflationary with higher economic growth, and higher inflation, and eventually higher real interest rates. In short, a hotter and shorter business cycle.

So, I think investors should expect to see a changing dynamic, but I don't think you should be filled with the dread either going into the new year. I think we've had to roll with the punches a lot over the last couple of years in the pandemic market and there's going to be more of that ahead, but I think good things, too.