Year-to-date, the stock market is down 20-25%. Bonds are down 15% and the supposed inflation-fighting asset class of gold is down 10%.
Many financial experts are pontificating where inflation and the markets will go from here. But market forecasts are seldom accurate. At the beginning of the year several well-known and respected investment firms gave their market forecast for 2022. They ranged from up 6% to up 11%.(1) These predictions are not even close to what happened this year.
Given that expert predictions are of no use, what can we do to make the best decisions going forward? The market may not repeat over time, but it tends to rhyme. So, it may be helpful to learn from the past.
Learning From the Past
Interest rates have increased many times in market history. Prior interest rate increases, even significant increases, did not prevent markets from going higher. In the inflationary 70’s (1972-198) interest rates increased by over 11%. Those that remained invested in the market and reinvested dividends during that period achieved an annualized return of over 7%.(2)
Even when we have faced brutal bear markets, they often recovered within a few years. The Global Financial crisis saw markets drop 56%, but within 3 years of hitting the bottom, it had recovered all its loss plus some.(3) Past performance may not repeat itself, but history shows markets and economies have a history of adapting, adjusting, and recovering from difficult times.
As you decide what to do going forward, I encourage you to ignore forecasts. They may be alluring and provide an illusion of certainty but may mislead you to making an unwise decision.
Instead, let’s have a conversation together. This will help put things in proper perspective by identifying your current situation, learning from past situations, and discussing the pros and cons of your current strategy as well as any potential changes needed. Overall trust your plan and the process.
©2022 The Behavioral Finance Network
The Wall Street Journal, January 2, 2022. Cheaper Stocks Boost S&P 500’s Prospects in New Year
Market returns represented by the S&P 500 Index and includes reinvestment of dividends. Returns calculated at https://dqydj.com/sp-500-return-calculator/. The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. All indices are unmanaged and may not be invested into directly.
A Wealth of Common Sense, Y Charts.3-year performance is calculated from the date of each bear market trough (max decline)