Perhaps nothing summarizes the investor experience better than the old quote that “nothing worth doing is easy.” The current market environment, as uncomfortable as it may be, serves as a reminder that staying invested can be difficult. The very definition of investing involves sacrificing what we could buy and consume today with the expectation to achieve more tomorrow. Over long periods, this is how some investors can transform hard-earned savings into true wealth and financial freedom. What can investors do today to not lose focus?
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The signals on short-term direction are unclear
The tendency to react to what’s happening today at the expense of the next year or decade is a natural one. Recently, the Federal Reserve raised interest rates by half a percent (50 basis points), the largest increase in over 20 years. After a short recovery, major stock market indices began to struggle once again. At the moment, all major U.S. indices are still in correction territory with the Nasdaq now deeper in bear market territory. This is no doubt a challenging time for many investors, both emotionally and financially, especially for those who are either accustomed to or have only experienced the rising markets of the past decade or more.
Chart: the value of staying invested since the 2008 financial crisis with an initial investment of $1,000. It compares staying invested since the global financial crisis versus exiting the market temporarily and for the whole period. For illustrative purposes only. Past performance is no guarantee of future results.
Sources: Clearnomics, Standard & Poor’s
Rising bond yields attract cash
In times like these, it’s important for long-term investors to remember a few facts. First, while the stock market is in the red for the year, zooming out paints a very different picture. Analysis by Clearnomics shows that the S&P 500 has gained 60% over the past three years, 18% since the pre-pandemic peak in early 2020, and 79% from the pandemic bottom. While investors may prefer a smooth ride, with steady gains day after day, this is unfortunately not how the market operates. Instead, the price of long-term gains is the ability to stomach short-term declines.
Second, the stock market can swing wildly even when there is little new information. This year, the S&P 500 has experienced several distinct declines. While this may feel like a lot, Clearnomics data show the average year experiences four to five of these pullbacks, most of which are followed by recoveries in weeks or months. The pandemic caused 12 such pullbacks in 2020 and there were eight in 2019 during the global growth scare that year — a time when many expected an immediate recession, which never materialized.
Third, what drives markets in the long run are not day-to-day headlines, stock predictions, or even year-end targets. Instead, the vibrancy of the economy, the strength of the consumer, and the profitability of companies large and small are what support stock prices over the course of decades. After all, owning a stock is nothing more than owning a share of the profits of a company.
Don’t panic, be vigilant
None of this discussion is meant to ignore or downplay the challenges that lie ahead for markets. There is no reason that investing should be easy, and in today’s market environment, it’s important for investors to be aware of the long-term process.