Investors in stocks and bonds have seen the value of their holdings fall significantly in 2022. US stocks are off 17% through August, non-US stocks are off 19% and bonds are off 11%. You might conclude that this is a dangerous time to be an investor. Everything seems so uncertain – the markets, the economy, US and global politics, and on and on.
I would respectfully disagree.
The most dangerous time to be an investor is when everything seems certain – when you are sure what will come next. That is when an investor takes too much risk. That is when an investor just assumes the recent trends will continue. That is when an investor decides diversification is a waste of time.
We don’t need to look back very far in time for three excellent examples of how the world can change suddenly – of how everything that seems certain suddenly proves uncertain.
- In March 2020, COVID-19 changed our world dramatically. While there were rumblings for several months from China and then Italy, most of the world was oblivious. Then, in the span of several weeks, the news media and the stock markets decided this was a crisis. Markets fell more than 35% in just over a month. Very few saw it coming.
- In the next few months of 2020, although the virus was spreading at an ever-greater pace, investors suddenly decided that most stocks would not suffer. By mid-July, all the losses of March and April had been recouped. By year-end, 2020 had become a great year to own US stocks – up almost 20%. On March 31, I heard no one making such a prediction.
- On Jan 1, 2022, we had just wrapped up a remarkable year and a remarkable decade. Over the previous decade, despite COVID and several more modest downturns, the US market had returned 15% annually. Tech stocks had done even better. The market forecasts I saw suggested we should expect more of the same. We have all seen how wrong that was.
Today, no one seems to know how to invest. We face inflation, recession, rising interest rates, the war in Ukraine … the list goes on.
I don’t know what the next few months or years will hold for investors. But history tells me it will be a surprise.
Despite this cloudy picture, our investment strategy is clear – and it is consistent. What we believe you should do:
Determine how much risk you can take, based on your unique financial plan. Your plan will tell you how much to keep in relatively safer investments like bonds and cash. In 2022, bonds have not provided the cushion we would expect, but over time, they almost surely will. That is also a reason to have some of your cushion in cash or short-term bonds.
With the balance – the money you can put at risk -- buy primarily diversified, low-fee stock mutual funds or exchange traded funds (ETFs).
Avoid putting too much in any one kind of investment – an individual stock or a sector. The most popular sector today is real estate because it has done so well the past few years. Real estate is a great diversifier. But you only need look back to the 2007-2009 crisis to see that real estate is not a sure thing. Within two years, real estate went from being the best way to invest to the cause of a global economic collapse.
Keep a long-term focus
With your risk money, focus on 10-year and 20-year returns. There will be good years and bad years. What you should care about with your risk money is the long-term.
If you have a comprehensive financial plan and you can take a long-term view, this is not the most dangerous time to invest. It may feel that way, but it is not.