An Awful, No-good Start to 2022

The 20% decline for the S&P 500 over the first half of the year ranks in the worst 3% of all 6 month returns dating back to 1926. Bad enough, but it doesn’t stop there. We also experienced a rare “double dip” – with stocks and bonds both falling simultaneously for two consecutive quarters – for just the fourth time on record. (Statistics courtesy of Ben Carlson, CFA at Ritholz Wealth Management)

The pain has been obvious to anyone checking their account statements as of late. We could talk about how stocks have typically bounced back quite strongly after two straight down quarters, but that doesn’t take away the sting of the decline. And there are certainly no “sure things” when it comes to the markets. But perhaps some “big picture” context might be of some value.

Suppose you went to a fortune teller that was able to predict with absolute certainty the following events over the next 36 months: a global pandemic plunging the world into a recession, a major armed conflict in Europe, a 40-year record inflationary spike and two bear market declines for stocks. Would you be willing to invest? That does not present a very comforting outlook.

Now imagine another scenario. A forecaster could offer no information about specific events that would unfold in the future, but was able to accurately predict that the return for stocks would average 10.6% annually over the subsequent 3 years. That seems pretty enticing.

You may have guessed that these are both descriptions of the past three years (except, of course, for the existence of accurate prognosticators). And there are two important takeaways for this thought exercise: 1) Correctly anticipating major world events would not make investing simpler. And, 2) Knowing future investment returns also wouldn’t mean the experience would be pleasant or comfortable. It’s really, truly never going to be easy.

It’s certainly been stomach churning, but the S&P 500 Index has in fact generated returns of 10.6% annually, despite all the volatility and global turmoil over the past 3 years, and even despite the current bear market. Steady and consistent gains would definitely be preferred, but we don’t have that option.

It’s human nature to focus on a prior “high water mark” for our investments, but the reality is that stocks spend a great deal of time below some previous high point. We know that investment returns are “lumpy” and “irregular.” The average frequency of a decline greater than 15% is about once every 3 years, so it’s something to be expected. There’s just no way around it.

That’s why both financial planning and investing are never predicated on the short-term. Recent losses are absolutely no fun, but we invest for the long-term because it works in the long-term. Even with this year’s setback, the S&P 500 is 70% higher than it was 5 years ago, and 238% higher than 10 years ago. That’s something to appreciate, even despite the past few months.

For clients who are living on their investments, this is a perfect example of why we plan for five to ten years of cash flows. You can keep living your current good life, and that is what is most important. For those still in the accumulation phase, it is important to keep staying the course.

As always, we are here to discuss any concerns or questions that you might have. Thank you for hanging in there with us!