Each year I like to review the prior year in our market results and restate our general principles for all clients. I will try to keep it short and clear as I can to update my perspective on the market and the way we approach the equity market into the next year of 2022. You and I are long term, goal focused, plan driven equity investors.
We believe that the key to lifetime success in equity(stock) investing is to act continuously on a specific, written plan. Likewise, we believe substandard returns and even investment failure come inevitably from reacting to current economic/market events.
We’re convinced that the economy cannot be consistently forecast, nor the markets consistently timed. Therefore, we believe that the only reliable way to capture the full long-term return of equities is to ride out their frequent but historically always temporary declines.
Just in the last four decades or so, the average annual price decline from a peak to a trough in the S&P 500 exceeded 14%. One year in five, the decline has averaged at least twice that. And on two occasions (in 2000-02 and 2007-09), the Index has actually halved. Yet the S&P 500 came into 1980 at an index of 106, and went out of 2021 at an index of 4778: over those 42 years, its average annual compound rate of total return (that is, with dividends reinvested) was more than 12%.
These data underscore my conviction that the essential challenge to long-term successful equity investing is neither intellectual nor financial, but temperamental: it is how one reacts, or chooses not to react, to market declines.
These principles will continue to govern the essentially behavioral nature of my advice to you in the coming year…. and beyond.
Current Observations
It would seem to be counterproductive to look at these past 12 months in isolation. They were, rather the second act of a drama that began in 2020, the precipitant of which was the greatest global public health crisis in a hundred years.
The world elected to respond to the onset of the pandemic essentially by shutting down the global economy- placing it, if you will, in a kind of medically induced coma. In this country, we experienced the fastest economic recession ever, and a one-third decline in the S&P 500 in just 33 days.
Congress and the Federal Reserve responded all but immediately with a wave of fiscal and monetary stimulus which was and remains without historical precedent.
This point cannot be overstressed: we are in the midst of a fiscal and particularly a monetary experiment which has no direct antecedents.
This renders all economic forecasting–and all investment policy based on such forecasts-hugely speculative. I infer from this if there were ever a time to just put our heads down and work our investment and financial plan-ignoring the noise-this is surely it.
If 2020 was the year of virus, 2021 was the year of the vaccines. Vaccination as well as acquired natural immunity is in the ascendancy, regardless of how many more Greek-letter variants are discovered and trumpeted to the skies as the new apocalypse. This fact, it seems to me, is the key to a coherent view of 2022.
In general, I think it most likely that in the coming year (a) the lethality of the virus continues to wane, (b) the world economy continues to reopen (c) corporate earnings continue to advance, (d) the Federal Reserve begins draining the excess liquidity from the banking system, with some resultant increase in interest rates, (e) inflation subsides somewhat, and (f) barring some other exogenous variable – which
we can never really do- equity values continue to advance, though at something less (and probably a lot less) than the blazing pace at which they’ve been soaring since the market trough of March 2020.
Please don’t mistake this for a forecast. All I said, and now say again, is that these outcomes seem to me more likely than not. I’m fully prepared to be wrong on any or all of the above points; if and when I am, my recommendation to you will be unaffected, since our investment policy is driven entirely by the plan we’ve made, and not at all by current events.
With that out of the way, allow me to offer a more personal observation. To wit: these have undoubtedly been the two most shocking and terrifying years for investors since the Global Financial Crisis of 2008-09- first the outbreak of the pandemic, next the bitterly partisan election, then the pandemic’s second major wave, and most recently a 40-year inflation spike. You might not be human if you haven’t experienced serious volatility fatigue at some point. I know I have.
But like that earlier episode, what came to matter most was not what the economy or the markets did, but what the investor himself/herself did. If the investor fled the equity market during either crisis-or, heaven forbid, both- his/her investment results seem unlikely ever to have recovered. If on the other hand he/she kept acting on a long-term plan rather than reacting to current events, positive outcomes followed. It was ever thus. I expect it always will be.
Many of you have a plan that we have prepared for you prior to doing any serious investing. This plan is something everyone needs. If you do not have a plan, I will be happy to provide one for you. This way, we have reviewed your goals, diversification, risk profile, and provided liquidity so that you do not need to sell any of your assets when we have a correction in the market. Without a holistic plan, it does not make sense to invest any of your “hard earned” money. Call me if you do not have a plan.
Most of the time, we can do a bucket plan that reviews all your current investments and makes sure of every financial asset you have including wills, trusts, etc. After this review, we can determine if you have enough liquidity and your pyramid of risk is appropriate for your investments. A plan should be developed before any investments are made. Of course, these plans have costs but I believe it is the
best money that you can spend to protect your assets, meet your financial needs, and provide liquidity. In addition, this will most likely uncover tax savings for your portfolio too. In the end, it is an important task that we should complete with your input and approval.
Call me if you are interested in developing your plan.
As always, I welcome your comments, questions, and concerns. I can’t predict future financial landscape or events, but I can plan. As always, thank you for being my clients. It is a privilege to serve you.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. 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. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. The opinions expressed in this material do not necessarily reflect the views of LPL Financial.
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