Imagine you just came back from a 15-year vacation and decided to check your investments. Suppose there was no “YTD” button on your online brokerage?
By Mike and Ryan O’Donnell, CFP®
Key Takeaways
Stay disciplined and ignore the noise.
We have to endure some volatility at time to achieve a positive investor outcome long-term.
Even with this year’s sell-off, stocks are essentially unchanged over the past 12 months and well into positive territory over three, five and ten years.
Market volatility is sky high. We’re on the cusp of a bear market. Inflation is at a 40-year high, and recession may be imminent. We know it’s hard to stay positive.
At times like these, our best advice is simply to “avoid the noise.” In order to have a positive investment experience, you need to have an investment philosophy you believe in, and you need to remain disciplined – even when others are panicking.
15-year vacation
Let’s rewind the calendar to 2007. Imagine you just sold your company for $1 million and put those proceeds into the stock market. Remember when many people said you were foolish since the market was at its all-time high then? Well, let’s say you rewarded yourself for all your years of hard-work and took a 15-year vacation to recharge on a remote island with no Internet or cell service. Now let’s say an important family gathering brought you back home and you decided to get caught up on the news.
Pretty shocking, right? You missed that Lehman brothers went bankrupt. You missed the Great Recession of 2008-09 and the COVID recession of 2020. Two of the most punishing recessions since the Great Depression froze capital markets and crashed the real estate market. A businessman with no political experience became President. The worst pandemic since the Spanish flu of 1918 cost 1 million Americans their lives. Shocking as those events were, when you looked at your account balance you see your $1 million is now worth almost $2.7 million. “Not bad,” you think to yourself. “I didn’t get the 9% a year I had hoped for, but I did better than 6% a year and nearly tripled my money.”
In order to get returns like these you have live through some volatility. We know it’s been painful the past couple of months to watch the markets drop here and abroad. But if you remain patient and disciplined during these stressful times, you will be rewarded for your steadfastness. In addition to helping you stick to your plan and tune out the noise, we do other things for our clients behind the scenes such as rebalancing their portfolios as needed and buying more stocks (not less) when the markets drop. This puts us in better position when the markets rebound.
Keeping things in perspective
Between inflation, supply chain disruptions, rising interest rates and the war in Ukraine, you may not be sleeping as well as you’d like. But we’d like to share a few charts with you from our friends at Morningstar to help keep things in perspective.
Rising interest rates: In March, the Fed raised interest rates by 0.5% (50 basis points), the first in a series of planned rate hikes that have spooked the stock, bond and real estate markets -- even though they were highly anticipated. As expected, stocks and bonds are in retreat, but going back to 1990 (see chart at left), stocks have returned nearly 9% on average, six months after a 50-basis (or greater) rate hike and have returned nearly 21% on average twelve months after the initial rate hike. Bonds also tend to perform well after initial rate hikes (+5.9% after six months and +13.8% after twelve months), according to Morningstar.
Stocks: 3rd worst start to a year since 1926: Like a hangover that never ends, stocks stumbled out of the gates in the first week of January and still haven’t regained their footing. Down 12.9% for the first four months of 2022, stocks are off to their third worst start to a year since the Great Depression. Many talking heads on TV would like you to head for the hills. Just know that slow starts in equities don’t often translate into off years. Going back to 1926 (see above), stocks on average returned +14.1%, eight months after a historically bad start and +24.7%, twelve months after a historically bad start. A slow start doesn’t guarantee a strong year ahead. It’s just that worries about the factors causing the slow start are not persistent enough to depress equities for the longer term.
Bonds: worst start to a year since the Great Depression: Having lost 9.5% for the first four months of 2020, bonds are off to their worst start to a year in almost a century. But if you peel back the onion and look at the 10 worst starts to a year for bonds, you’ll see this asset class returned +5.2% on average over the next eight months and +7.3% over the next 12 months following historically bad starts. As with stocks, a slow start for bonds doesn’t guarantee a strong year ahead. It’s just that worries about factors causing the slow start are not persistent enough to depress fixed income for the longer term.
Ditch the YTD button
Year to date through mid-May, S&P 500 is down about 14.3%. Ouch!
1-YR: But expanding our view, the past 12 months have been pretty uneventful, down only about 1%
3-YR: Going back three years, things look even more promising, up 45% (+ 13.2 annually), even including the big selloff this year.
10-YR: And going back 10 years, the S&P 500 has returned about 203% (11.7% annually)
5-YR: Going back five years, the S&P 500 has returned about 71% (about 11.3% annually)
Conclusion
Taking the long view is the best way to keep your sanity and ensure a positive investor experience. John Quincy Adams once said: “Patience and perseverance have a magical effect before which difficulties disappear and obstacles vanish.” Or as Warren Buffet likes to say: “Be fearful when people are greedy and be greedy when people are fearful.” We are happy to discuss any questions you may have about your portfolio or retirement plan. Please don’t hesitate to reach out.
