Media reports that the first half of 2022 was the worst start to a year for the stock market in over 50 years. And it was the worst start to the bond market ever. We are currently in a bear market. Markets are not something to be feared, just understood.
Here are three essential points that can help you maintain a good perspective:
- The history of the market is constantly in motion. “Worst ever” and “best ever” will continue to occur. The media will have a heyday with it. We accept it as a fact of life and stay out of the mess.
- While bear markets are uncomfortable and can instill fear, they are essential to healthy capital markets. They squeeze out the excess, encourage companies to become more efficient and pave the way for the next bull market.
- The greatest asset an investor has is a personal choice. We cannot control (nor predict) markets, but we control how we respond. Many will choose to sell in the face of losses. It is better to exercise patience and “strategic ignorance” – ignore financial news and account values until these things get worked out.
Inflation & Recession
- We are in a period of high inflation. While it may not keep going higher, these elevated levels will persist. With the Fed increasing interest rates and tightening the money supply (quantitative tightening), there is a decent chance that many global economies will experience a recession.
- A recession is often the cure for the disease of inflation. Recessions are preferred to inflation. Expect the media to try to instill fear about an upcoming recession. We acknowledge the facts but need to stay clear from the fear-mongering.
- In past recessions, we usually suffer a significant increase in unemployment. But this time, unemployment is relatively low, and companies are still trying to hire. Unemployment may increase, but given the current low levels, it is uncertain how much of a factor this would be to the overall economy. We are still writing the history of markets and economies.
- To look forward, we need to look back. Remind yourself that you have experienced imperfect markets before. Are you ahead of where you were ten years ago? We should expect the media will promote every piece of negative news they can (fear sells). We should expect to get concerned and perhaps feel anxious about the future. In fact, the more we tune in to the media and look at account values, the more anxiety we can expect to feel. And the more fear we feel, the more we may be tempted to make a very unwise decision.
- We can also learn from history. Remember back to March of 2009. It was ultimate despair after going through over two years of a Global Financial Crisis with little hope that things would change. There was nothing positive to look forward to. And yet, that was when the market hit bottom. Since March 9, 2009, the market compounded at 17.6% annually for the next 12 years. Those investors who stayed in the market participated in that increase.
- During these times, the best thing to do is focus on what you control. You know what you spend. You own what you pay attention to; tuning out media speculation is healthy. We designed your asset allocation to expect recessions and bear markets to occur. While it can be uncomfortable to live through, none of this is unexpected nor outside the realm of what happens in healthy capital markets.