Putting Markets in Perspective
Hatem Dhiab, Managing Partner
May 6, 2022
Undoubtedly, 2022 will go down in history as one of the most surprising, unpredictable, and tumultuous years in recent memory, both geopolitically and for the markets. The S&P 500 Index is on track for its worst start since 1939, the Nasdaq is in a bear market, and bonds, which typically provide ballast for diversified portfolios during periods of stock market volatility, have not protected us.
Markets face a number of threats. The COVID-19 pandemic has contributed to a disappointing start to the year for the U.S. economy as evidenced by the -1.4% growth in gross domestic product (GDP). COVID-19 continues to disrupt global supply chains amid intermittent lockdowns in some of China’s largest cities. Russia’s devastating assault on Ukraine, arguably the biggest geopolitical threat in Europe since WWII, has added to the worst inflation problem in the U.S. since the 1970s. The bond market is pricing in nine more Federal Reserve (Fed) rate hikes, after looking for only three when the year began.
That’s a lot for investors to digest.
However deep and strong, the issues that worry investors today aren't new. Staying focused despite the day-to-day distractions of the market is never easy, especially during periods of economic and political uncertainty. Investors who remain committed to their investment strategy and plan, even when it’s tempting to head to the sidelines, are far better positioned to achieve their short and long-term goals.
Case and point is March 2020, when COVID first emerged, the S&P fell 35% in a span of 4 weeks, investors who bailed then missed a great recovery where the S&P ended up by a little over 13% by year-end. It’s just simply impossible to forecast short-term moves and best to stay disciplined and focused on your strategy.
Below is a chart of the market over the last 15 years showing the S&P and all the corresponding headlines. It’s obvious that despite all the uncertainty of wars, the impeachment of a US president, a financial crisis, and a pandemic--and the list of worries goes on, patient and disciplined investors were handsomely rewarded.
As we step into more uncertainty with mid-term elections coming up in November and an ever more fragile and fragmented society and world, here are a few ways that can help you manage the volatility & instabilities.
Don’t let emotions drive your decisions:
Emotions can lead to irrational decision-making and impulsive decisions that compromise the realization of your stated goals and aspirations. Before reacting impulsively, make a list of your concerns, revisit your goals and revisit your strategy. If your goals and/or priorities have changed, or if your strategy is no longer appropriate then that is the time to discuss with me or your advisor.
Understand your tolerance for risk:
Risk is an inherent part of investing. You can limit it, you can defend against it but you cannot eliminate it. The really important thing is to have a well-informed understanding of how much risk is within your portfolio and what you can tolerate. Working with your advisor on figuring out your tolerance is perhaps the most important step in designing the long-term strategy that is most suited for your needs.
Despite everyone’s best efforts, it’s virtually impossible to guess in advance which asset class will have the best return in any given year. Spreading your investment dollars between different asset classes is an important tool to manage investment risk. While fixed income may have not helped this year, it’s likely that the income received will help mitigate some of the losses as things get back into balance.
Investors who stay the course have historically been rewarded for their patience. When you look at market performance over decades rather than just a year or two, you will find that while it may contract, it also expands, with the large gains often concentrated in a handful of trading days that you don’t want to miss.
Warren Buffet famously said, “Be greedy when others are fearful, be fearful when others are greedy”. Whenever volatility spikes, fear also follows. The two emotions are simply inextricable. If you have the liquidity, the nerves, and most importantly the time frame, these can be the best times to be a buyer or look at beaten-down sectors and opportunities.
Work with Your Advisor:
Identifying your goals and aligning those goals with your own risk tolerance is one of the most important steps to designing an effective investment strategy. When you work with us, we can offer a much-needed perspective and help identify and hopefully minimize the consequences of impulsive and irrational decisions. Most importantly, we can share our knowledge and resources to help provide you with gainful insights into markets, and new opportunities, while grasping the impacts of larger economic issues and specific strategies.
Don’t go at it alone when you can have a trusted partner.