There have been so many big events competing for our attention this year… said nearly every investor, almost every year, ever.
We’re not making light of this year's uncertainties.
- Inflation is real, and needs to be managed. (Read our article here, Investing in Inflationary Times)
- We also can’t rule out the possibility we’ll still see stagflation and/or a recession (although neither has happened yet). (Read our article here, How An Economic Recession Resembles A Bad Mood)
- Heightened levels of market volatility across stock and bond markets alike may have left you once again wondering whether this time is different. (Read our article here, Too Costly To Hazard A Guess)
- Wider worries prey on our minds as well, such as the war in Ukraine; totalitarian aggression in other hot spots around the world; ongoing discord closer to home; and oh yes, climate change.
But it’s also important to remember, we’re inherently biased to pay more attention to recent alarms than long-ago news.
In the right context, this form of recency bias makes perfect sense. As we go about our lives, it’s often best to prioritize our most immediate concerns—or else. No wonder we’ve gotten so good at it. However, as an investor, if you overemphasize the news that looms the largest, you’re far more likely to damage your investments than do them any favors.
You’ll end up chasing hot trends, only to watch them combust or fizzle away. Or worse, you’ll risk jumping out during the downturns, without knowing when to jump back in.
We can help defend against our own instincts by placing current events in historical context.
Do you remember what investors were worrying about last year?
Recall the excitement of GameStop and other meme stocks. (Read our article here, The Game-ification of Investing & GameStop)
That feeding frenzy was soon followed by SPACs and non-fungible tokens (NFTs) flying every which way. (Read our article here, Creatures of the Investing Jungle (SPACs and NFTs))
It all finally culminated in the pursuit of fluffy little dogecoins. (Read our article here, Caught up in Cryptocurrency)
Do you remember what investors were worrying about several years ago?
If you experienced some or all of these events first-hand, you might recall how you felt at the time, before we had today’s hindsight to inform our next steps:
- 2021: The Taliban takes control in Afghanistan, while a “ragtag army” of online traders storms Wall Street.
- 2020: COVID-19 shuts down economies worldwide. Civil unrest rides high across a gamut of socioeconomic concerns, and a divisive U.S. presidential election looms large.
- 2018: Two U.S. government shutdowns occur—in January and again at year-end, with the latter lasting more than a month.
- 2017: The year-end Tax Cuts and Jobs Act (TCJA) upends U.S. tax codes.
- 2016: The Brexit referendum and U.S. presidential election deliver surprising outcomes.
- 2015: A long-simmering Greek debt crisis erupts.
- 2013: A 16-day U.S. government shut-down occurs in the fall.
- 2012: The U.S. narrowly averts plummeting over a fiscal cliff.
- 2011: For the first time, the U.S. federal government credit rating is downgraded by one of the major rating agencies from AAA to AA+, and the Occupy Wallstreet movement is born.
- 2008: Wall Street broker and former NASDAQ chair Bernie Madoff is arrested for fraud.
- 2007: The Great Recession and global financial crisis begins.
Do you remember what investors were worrying about several decades ago?
- 2001: The 9/11 terrorist attacks send global markets reeling. An accounting scandal at Enron culminates in the energy giant’s bankruptcy.
- 1999: The dot-com bubble bursts; the Y2K bug spurs massive, worldwide computer reprogramming.
- 1990: Iraq invades Kuwait.
- 1980: U.S. inflation peaks at 14.8%; Americans are marching in the streets over the price of groceries. Also, the U.S. Savings and Loan crisis begins, ultimately costing taxpayers an estimated $124 billion.
- 1973: An OPEC oil embargo “fueled bedlam in America.”
- 1955: The Vietnam War begins.
These are just a few examples. They don’t include the market’s endless stream of lesser alarms that are easy to dismiss in hindsight, but often generated as much real-time storm and fury as the more memorable events.
What's Happening versus What's Always Happened
The point is, there’s always something major going on. And even as global markets persist, we forget or rewrite our memories, until they’re no longer available to inform our current resolve.
History supports an expectation of investment growth, but only for those that can accept continued uncertainty. (Read our article here, Temporary Declines Interrupting A Permanent Advance?)
In the face of today’s challenges and tomorrow’s unknowns, we advise looking past recent trends, and focusing instead on the financial basics that have stood the test of time. They may seem unremarkable compared to the breaking news. But when has “buy low, sell high,” or “a penny saved is a penny earned” become a bad idea once all the excitement is over?
We can help put today's uncertainties in perspective. Reach out to us anytime at www.openwindowFS.com/connection.
S&P 500 Index total returns in USD, January 1926–December 2021. Using a 20% threshold for downturns.
Bear markets are downturns of 20% or greater from new index highs. Bull markets are subsequent rises following the bear market trough through the next new market high.
Past performance is no guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.
Dimensional Fund Advisors chart © 2021. Chart end date is 12/31/2021, the last peak to trough return of 119% represents the return through December 2021. Due to the availability of data, monthly returns are used from January 1926 through December 1989; daily returns are used from January 1990 through the present. Periods in which cumulative return from the peak is –20% or lower and a recovery of 20% from the trough has not yet occurred are considered bear markets. Bull markets are subsequent rises following the bear market trough through the next recovery of at least 20%. The chart shows bear markets and bull markets, the number of months they lasted, and the associated cumulative performance for each market period. Results for different time periods could differ from the results shown.
Source: S&P data © 2022 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.