It can be quite uncomfortable to review your investments when, after a few years of pretty good markets, all of a sudden higher inflation kicks in, interest rates start to rise, and now add some aggressive Russians who all combine to help make the future even more uncertain than usual.
Events may cause some to feel compelled to switch to “safe” investments. Negative events and headlines have always had an undue influence on investment decisions. However, we are in a period where bond rates, taking into account inflation and taxes, have gone from being a risk-free return to a “risk-free return” status.
This is because bond income alone cannot sustain increases in your living expenses over time. Additionally, in times of global uncertainty, the world flies to the US Treasury market. This increased demand leads to an even greater drop in current rates.
“Russia’s invasion of Ukraine added to an already tense year, with investors selling first and asking questions later,” said Ryan Detrick, chief market strategist at LPL Financial. “But it’s important to know that past major geopolitical events were usually short-term market issues, especially if the economy was on solid footing.” Like ours now. We believe that the biggest effects on the market and the economy may ultimately be limited to energy and energy prices.
Scary headlines can trigger short-term negative reactions and can shake your short-term confidence. But eventually, these fade and the markets begin to weigh economic fundamentals again as they usually do, coolly and rationally. We think they will see that the likelihood of this escalating into a global conflict causing a recession is extremely low. Of all the conflicts since reliable S&P 500 data began in 1925, only the start of World War II has caused a bear market.
The stock market is heartless. He often rises in the face of terrible events when it almost doesn’t seem right. From the start of World War II in 1939 until its end at the end of 1945, the Dow rose 50% overall, or more than 7% per year.
Geopolitical events can be important, but looking at the Brexit referendum or the Greek debt crisis, we are reminded that they often have less effect on long-term markets and can provide buying opportunities for those who are ready to manage the short term. volatility. And remember, this volatility is not that unusual.
Over the past four decades or so, the average price decline from peak to trough in the S&P 500 each year has exceeded 14%. One year out of five, the decline is on average at least double. And twice, in 2000-02 and 2007-09, the index was actually more than half that. The S&P 500 started 1980 at 106 and exited 2021 at 4,766. So over those 42 years, its average annual compound total rate of return, i.e. with dividends reinvested, was greater than 12%. And that includes all those annual drops.
The key to lifelong success in investing is to constantly act on a specific written strategy. When planning a long-term investment, whether you’re already retired or still planning, you need to take into account considerations such as the income, in today’s dollars, you need to live as you wish. Also consider your longevity and don’t assume it will be short. What inflation rate should I use? For reference, we found that 3% has been the average annual rate in the United States since the 1920s. And finally, how much do I want to leave to beneficiaries or charities?
In order for your long-term income to account for inflation – the hidden tax – you need to include stocks. Many people say stocks are risky. In the short term, that may be true, that’s for sure. However, please consider these facts: From May 1946 to February 2022, the S&P 500, now at around 4,380, rose around 225 times. The S&P dividend in May 1946 operated at an annual rate of about $0.68. In 2021, it was $60.40, or 88 times more. The consumer price index measuring inflation during this period only increased by 15 times. And remember all the crises and uncertainties that took place during this period.
Substandard returns and even investment failures usually happen to those who don’t have a strategy and instead react to current economic/market events.
Markets can go up and down a lot for no apparent reason. Headline writers are adept at creating mountains of anxiety for investors simply by the way they frame otherwise innocuous news. Your perceptions become blurred as a result. Using sensationalized words for mundane events such as the daily rise or fall of the market can affect your decisions. This is a good reason why you don’t trade the big names.
We are convinced that the economy cannot be predicted consistently, nor the markets timed consistently. Therefore, we believe that the only reliable way for you to capture the full long-term return of equities is to ride out their historic, but still temporary, declines.
These data reinforce my conviction that the essential issue for a successful long-term investor is neither intellectual nor financial, but behavioral. It’s how you react – or choose not to react – to market declines that will affect your long-term results.
Michael J. Maehl is a financial advisor and senior vice president of Opus 111 Group, a Seattle-based financial services company. He can be reached at 509.944.1790.