Investors face a scary world. At least, that's the feedback we hear from many clients and friends.
The concerns we hear are political, particularly US-related. The concerns are about global security - especially in the Middle East, Russia / Ukraine, North Korea, and China / Taiwan. The concerns are economic: will we have a US or global recession? Is there too much debt in the system? Will high inflation return? The concerns are related to the stock market: has it risen too much? We also hear legitimate concerns about the erosion of democracy, the threats to our planet, immigration and border security in the US and around the world, and whether America's best days are behind us.
Saturday Night Live fans may accuse me of impersonating Debbie Downer. The point of this blog is not to be negative. That's not productive.
Instead, the point is to acknowledge we face many challenges – just as we have faced many challenges in the past. I've attached a graphic produced by our friends at Dimensional Fund Advisors. It shows the world stock market's growth in value over the last 50+ years in the face of multiple challenges. Please look at what we went through during that time. Try to remember (or, for younger readers, imagine) what it was like to face these setbacks. As each crisis dawned, investors had legitimate worries. In some cases, the market dropped violently.
But the message of this chart – and the lesson of the last 50+ years – is that capitalism creates value for investors who take a long-term view. Despite many challenges, $1 invested in a mix of global stocks grew to $80 over a half-century. That's far better than inflation, bonds, or cash.
There is plenty of volatility in this chart. But I suspect you don't really notice the ups and downs. That's because - by looking over decades instead of zooming into the crisis du jour - you notice what truly matters to an investor's wealth: the long-term trend.
The worries I mentioned at the top are legitimate. And, as we saw with COVID, we are unaware of other crises that will appear.
As an investor, you have three fundamental choices:
- Embrace the market, keeping a long-term perspective and ignoring the short-term ups and downs.
- Try to time the market.
- Stay out of the market.
History tells us that option 1 will likely generate attractive returns but will require a strong stomach. Option 2 has a low likelihood of success. As we saw most recently with COVID, predicting the market's sharp fall would have been difficult, and predicting the market's quick recovery would have been even harder. For most people, option 3 means reducing risk and expected long-term return by owning bonds or cash. Some have success with investments like real estate, but narrow investment strategies create their own risks.
No one ever said being a stock market investor is easy. But this chart strongly suggests that it's worth the pain.