Halftime

Question:  

As we enter the second half of the year, what are your thoughts and suggestions regarding investing?

Answer:

The first half of 2022 brought us the market’s worst start to a year since 1970. Concerns about a recession, what will the Fed do about interest rates, and the ongoing Ukraine/Russia war are all weighing heavily on the minds of investors and the world in general.

Sometimes it’s best to take a breath, step back and look at the big picture as it pertains to your unique situation, goals, and risk appetite. Reflecting may allow us to review asset allocation and objectives while figuratively taking a vacation from myopic day-to-day market activity, hopefully to return with a more optimistic perspective.

It’s been said that the power of compound interest is the eighth wonder of the world and often underestimated. For example, assume an investment of $100 per month in the S&P 500 beginning in 2002. Over this twenty-year period, the investor would have deposited a total of $24,000 and would have experienced three significant S&P 500 bear markets: the Great Recession (-57%), the COVID-19 pandemic (-34%), and the 24% decline this year. Even still, the initial investment would have more than doubled! In fact, the portfolio would have a market value today of more than ~$62,000. This is a reminder that a consistent strategy of periodic inflows and a long-term investment horizon can help weather severe downturns.

Timing the market is rarely successful, and often detrimental to a portfolio. If your pain point has been reached and you want to sell everything, the more difficult and challenging decision is when to reinvest. A more effective strategy may be to put in place a plan that includes cash-flow needs while understanding the risk associated with the stock market. This could help you remain disciplined and stay patient during times of volatility. Case in point: the annualized price return for the S&P 500 over the last 20 years is ~7.3%. Investors who missed the top ten best trading days of those 5,033 trading days would have only realized an average annualized return of 3.2%. Even worse, investors who missed the top 20 best trading days would have only realized 0.6% annually. 

The pendulum tends to swing too far in either direction when it comes to investor psychology which is represented by extreme optimism or pessimism. When most investors expect stocks to decline, healthy performance tends to follow. For example, one year after most declines, markets have been positive 90% of the time and up, on average, 15%. Conversely, when most investors think markets will rise, the forward 12-month performance has been positive only 55% of the times with essentially flat performance.

Everyone’s risk appetite is different. Diversification may help balance the risk/reward equation for long-term investors. Yes, the benefits of diversification have been limited this year, but over the past forty years, there have only been two other times (1984 and 1994) when both stocks and bonds have been negative at the same time. Having a financial plan and asset allocation strategy should serve as a guide and keep emotions from dictating portfolio decisions during volatile times. Don’t forget to breathe. Stay focused and plan accordingly.