Yes, but it’s always different. When there are declines or volatility in the market, it’s natural to question if the period we’re experiencing today and moving forward is distinct from what we’ve experienced in the past. Rather than grasping for unknown answers, it may be better to consider what we know.
Instead of trying to predict the future, we can look towards the past to gain insights. Each time the market has experienced uncertainty, whether it was the stagflation of the 1970s, the Dot Com Crash, the Great Recession, or the global pandemic, investors have wondered if this time was different. While history doesn’t necessarily repeat itself, it often rhymes. Each crisis or economic slowdown feels frightening in the moment, but historically, markets have rewarded long-term investors. If you find yourself questioning if this moment is different, ask yourself if there is something fundamentally different about the way markets work.
While headlines about inflation, interest rates, and staffing shortages are scary, markets are still functioning. In 2021, the average daily trading volume in equities was $775 billion. Buyers and sellers are continuing to trade. Each dollar traded reflects buyers' and sellers’ expectations.1
Markets are forward-looking, so it’s the unexpected news that will impact prices. Any optimistic or negative expectations have probably been incorporated into market prices. If your cousin is telling you to get out of the market because they heard it was going to get worse, chances are other investors have heard the same thing from their own cousin.
A long-term perspective can help even if your time horizon is short. US equity returns following sharp declines have, on average, been positive. Intra-year declines don’t necessarily mean your portfolio will be down by the end of the year. This is true for fixed income as well as equities. From January 1997 – June 30, 2022, 23% of the time quarterly returns of the Bloomberg US Aggregate Bond Index were negative. Only 4 of the calendar years during that same period had negative returns.2
The below exhibit shows that 9% of the time (yellow dots) both Fixed Income and Equity quarterly returns were negative during that time period.
Trying to time the market can be as risky as it is tempting. Missing out on even a brief period of strong returns can dramatically impact your investment experience.
If you had invested $1,000 at the beginning of 1976 in the Russell 3000 Index, it would have grown to $10,367 in 25 years. If you add some zeros onto your initial investment, that growth of wealth becomes quite substantial. Over that 25-year period, miss the Russell 3000’s best week, which ended November 28, 2008, and the value shrinks to $8,652. Miss the best three months, which ended June 22, 2020, and the total return falls to $7,308.3
We believe evidence is more helpful than emotions when it comes to investments decisions. Emotions are difficult to separate from finances, but using reason can help mitigate panic. Many questions about investment news are usually market timing questions in disguise. History tells us that trying to get in and out of markets is often difficult, stressful, and costly. Markets are continuing to incorporate expectations about the future. If the last couple of years have taught us anything, it’s that we don’t have crystal balls. Rather than giving into the allure of predicting the future, embracing logic and evidence, such as the benefits of diversification and a long-term approach, may lead to a better investment experience.