The Crazy (and Scary) Market Environment (Part 2)

This title appeared over my blog on March 24, 2020 and I’m using it again a little more than two years later as the S&P 500 Stock Index is down over 21% this year (as of 6/14/22).  A decline of 20% or more is called a “Bear Market”, but losing 18% doesn’t feel much better even if it doesn’t qualify for that term.  How much worse will the “Bear Market” get before beginning its recovery?  Who knows – certainly I don’t.  But perhaps some perspective of the past two plus years would be helpful.

Wouldn’t you know it, March 24, 2020 was almost the very low point in the last market cycle.  By the end of 2020 the market index had leapt 63% (and was up 16% from the prior year end).  One year after this low point, in March of 2021, the market was up 73%.  At the end of 2021 it had recovered over 107%.  And as of June 14, 2022 it was up 66% from that low point and nearly 18% since the end of 2019, which is about a 7% annualized return over the past 2 ½ years – not exactly terrible – despite the significant decline suffered this year.  If you are a long term investor these results reasonably demonstrate that downturns are not fatal and are an expected part of the conservatively expected results responsible financial advisors suggest.  Results that are difficult to realize in any other investment/asset class without significant drawbacks (illiquidity, concentrated risks, etc.).

So, what should we do now?

As I wrote March 24, 2020 (and still applies):

“I like to remind people (hopefully this is not news to you) that no one can accurately predict the future. Not about tomorrow, next month, next year, or 10 years from now. All the predictions and forecasts you’ll hear, or read, from talking heads, economists, highly paid strategists, and others are still largely inaccurate predictions of the future. I like to say, if I could accurately predict the future, I’d be in my mansion at Pebble Beach sipping expensive wine at every sunset. The point is, we cannot put much stock in any of these predictions, and investing based solely on these predictions is highly dangerous to your financial health. My advice is always to ignore these predictions (and even more so the ones that seem so sure of the outcome).

Remember that markets do not move in a straight line for long. Because a market moved down yesterday, last week or last year does not mean it will move down today, tomorrow, or over the next year. Same thing when markets are moving up. We simply cannot identify change points when markets reverse, and many a fool has tried and failed to do so, costing them dearly. Please acknowledge that if a past investment was bought at a low point, or sold at a high point, it was just luck, not foresight.

My belief is rooted in 6,000 years of human history which has demonstrated clearly that human self-interest leads to the exchange of goods or services that produces income and wealth. This translates to the capital markets we invest in that means, in aggregate, private businesses serving the public needs will produce income and wealth that grows over time. While there are short term setbacks, over the long run (5 years or more), markets will reflect this growth of wealth. We each can benefit if we’ll “swim with this stream” over the long run as well, profiting from the natural growth that occurs, not knowing which days, weeks, or months will suffer setbacks.

Finally, each investor should adopt and devotedly follow an investment strategy that focuses first on what we call “asset allocation” – a fancy way of determining how we’ll split our investment pool between riskier growth assets (equities), and safer fixed return assets (bonds, notes, and cash equivalents). All investments fall into one of these two categories (yes, including real estate, gold and bitcoin). This decision, and its rigorous implementation, will be the biggest determinant of how your portfolio performs – both the returns it will earn (growth) as well as the volatility it will experience (drop in value). Those who can tolerate more volatility can also expect, over long periods, greater returns. Those who want (or need) greater stability can expect, over long periods, lower returns. Key to implementing this strategy is that you’ll follow it devotedly through good times and bad rather than change it based on someone’s prediction about future events (invest in X to maximize gains in 2020!). Of course your strategy can change, but that should be based on your needs, not other’s forecasts.”

Investing success through time requires discipline and patience.  If you use a deliberate process aligned with the forces described above, you should be fine over time.  If you insist on “doing something” in volatile times, you nearly always will make your results worse. 

Patience is a great virtue.  I’ve been doing this for over 40 years and have ruled out every other approach as inconsistent and unreliable over long periods, thus I always fall back on the simplest, most reliable discipline and will put it up against any other approach over time until someone can prove they have a consistently better method with the same or less risk.  If you need help implementing (and maintaining) this approach, contact me for help.

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