Weariness and Resolve - Q3 investment markets review

October 14, 2022

Weariness and Resolve – Q3 investment markets review

The most recent quarterly investment performance was a sea of red. If you want to read the details, click on the link at the bottom of the page for a gory exploration of performance across many categories and markets. However, if you are like most people, you probably want just the headlines. Headlines: virtually every investment lost value – stocks did worse than bonds. If that causes your blood pressure to rise, then the most healthy thing for you to do may be to delete this email!

This quarter’s negative investment performance follows negative returns in each of the two previous quarters. As we digest persistent negative news, it may be easy to become fatigued and lose one’s resolve. It would be an understandable urge to decide that you’ve had enough, to sell your investments in order to “stop the bleeding.” But then what? Money sitting in cash is silently losing its value to inflation. While recent market performance is lousy, over long periods of time investing in stocks and bonds has been one of the most consistent ways to beat inflation. Since 1900, an investment in the S&P 500 has out-paced inflation by 6.6%. (See endnote (1) for the data source).

While there may be a temptation to try and time the markets, selling out before they “go down further.” Unfortunately, such a strategy, called market timing, has not worked out over time because we can’t accurately predict when the downturn shifts to an upturn. In the face of such future uncertainty, I typically look to the past for perspective.

Historical down markets

Below this paragraph is a static image showing market performance (the line) and economic recessions (green bars). If you click on the image, it will open an interactive chart where you can dive into details for various recessions. I am particularly intrigued by looking at the “recovery time” of markets during various recessions. Of the sixteen historical recessions shown in the graph, all but two had recovery periods of less than 3 years. We are currently nine months into a down market. While we can’t say that this market will act just like one of the previous markets, over a long enough time frame, I predict that this market will be another green bar on the chart.

Screenshot from interactive graph prepared by Dimensional Fund Advisors. Past performance should not be used to predict future performance

What will come next?

Predicting what the investment markets will do in the next 90 days, or even 365 days, is folly. While it is easy to make a prediction, it is a coin flip to get such a prediction right.

Actually, that is not quite true.

Historically at least, investment markets have gone up 3 out of every 4 years, and down the other. Thus, the odds over the next 365 days for positive returns are in our favor. The odds, of course, are probabilistic. There is no such thing as certainty in investing. However, the more often you do something, and the longer you do it, the more likely you are to hit the odds. In the case of investing, the “more often you do something” is achieved by diversification. The “longer you do it,” is achieved by having a long-term perspective.

When we design investment portfolios, we do so in the context of sound financial planning. Once we’ve talked about resiliency and good cash flow management, we embark on the question of “When will you need various buckets of money?” If the answer is not for several years, then it still makes sense to invest that money in a way where the odds of positive returns are in your favor. Otherwise, you are consenting to let the purchasing power of your dollars erode. For money that is needed sooner than 5+ years, or for money that you want in a less risky investment, the Series I bonds continue to offer a good option for those goals. You can read more about those here: Series I bonds: an investment to protect against inflation.

Create resolve

Weariness may lead to fatigue. One way to combat fatigue is to rest, review and reflect. In the case of your money and investments, rest, review and reflect means to check back in with your financial planning. What are your investments intended for? What is the purpose of those funds? Answering such questions can help you keep a broader perspective. Long-term investing is an expedition, not an errand to the grocery store. In an expedition, there will always be red seas that need to be navigated. By doing good planning, you can build up your resolve.

Detailed Report Q3 Investment Performance

The link below will open a 16-page dissection report of investment performance in the US and around the world during the third quarter. The report is created by Dimensional Fund Advisors, our data-focused partner in developing and managing investment products.