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It feels like everything is down this year! What's going on and what do I do? Thumbnail

It feels like everything is down this year! What's going on and what do I do?

How To Invest Financial Management

Rarely have we seen quarters with both stocks and bonds down at the same time. From March 1979 - March 2022 only 8% of quarters have experienced negative returns from both US Stocks and US Bonds (14/173 quarters).1 Periods like we're seeing today are not unprecedented, but they can be uncomfortable.

It's normal to be nervous, but you don't have to be scared. By accepting that uncertainty is part of investing, you can avoid unnecessary anxiety. If investing were a definite slam dunk without ambiguity, there might not be a reward. For an investment to do better than a investment from a money-market fund, it needs to carry risk.  

Information about risk and returns are being incorporated into market prices. A stock or bond's price reflects the aggregate expectations of all market participants. These expectations can include macroeconomic and company-specific factors as news develops. If you read an article about what XYZ news means for ABC company, it's likely that the information has already been incorporated by other buyers and sellers.

History shows us that markets have rewarded long-term investors. Think all the way back to two years ago. In March of 2020, the S&P 500 Index declined 33.79% from the previous high as the pandemic worsened.2 Even if investors were able to time getting out of the market, they were probably unable to correctly time getting back in. As more information became available, the S&P 500 Index jumped 17.57% from its March 23 low in just three trading sessions. Investors who fled to cash to try to time the market may have lost significantly. 

As always, there are many headlines with frightening narratives; but which ones are relevant? You may have heard that an inversion of the yield curve will lead to a market downturn. This may lead to a few questions such as What’s a Yield Curve? What’s an Inversion? Will this affect me? Dimensional’s recent article Is a Yield Curve Inversion Bad for Stock Returns? found that an inversion may not be a reliable indicator of stock market downturns. In 10 out of 14 cases of inversion, equity investors had positive returns in their home markets after 36 months.3 

The Fed has also been getting attention recently as it announced plans for a series of rate increases to combat inflation. On average, US equity market returns are reliably positive in months with increases in target rates.4 Similarly within bond markets, as we discussed last month, periods of rising rates do not necessarily result in negative returns. 

Cryptocurrencies have not been unphased either. Despite the endorsements of celebrities like Matt Damon, Kim Kardashian, and Elon Musk, crypto markets experienced a sell-off in what was described as a “perfect storm.” Although many investors invested in crypto as a safe alternative to equities, Bitcoin was down more than 40% as of May 12th. So called “stable coins” were also impacted as they experienced volatility and failed to deliver their own USD pegs. While we can’t predict the future, this is a reminder that the expected returns of cryptocurrencies are still unclear.5

FAANG (Facebook, Amazon, Apple, Netflix, and Google) stocks in particular have posted disappointing returns this year. As of May 5th, the group collectively underperformed the Russell 3000 Index by nine percentage points.6 This reversal is a warning about the allure of assuming past returns will continue in the future. 

An asset class isn’t down – commodities. But just because commodities were up 25.55% in Q1, doesn’t mean you should go all in on the asset class.7 While commodities are often touted for inflation protection, research shows that they may be too volatile as an effective hedge against inflation. Despite recent positive performance over the past 10 years ending 3/31/2022, US commodities have had a return of -.70% annualized. Deciding to add an allocation to commodities now my just be another example of market timing. 

While the future is uncertain, the quality of your choices doesn’t have to be. When headlines scream do something, remember lessons learned. A financial advisor can integrate your unique needs into a plan that you can stick with in good times and bad. They can help determine if it makes sense to make adjustments such as rebalancing or tax loss harvesting. There are things that matter and things we can control; focusing on the overlap between the two can lead to a better investment experience. 


Dimensional Fund Advisors

1. US Stocks: Russell 3000 Index. US Bonds: Bloomberg U.S. Aggregate Bond Index.

2. S&P data © 2021 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Indices are not available for direct investment.

3. The data showed a 71% chance (10 of 14) of a three-year positive return following a yield curve inversion. To compare, we measured returns three years following every month-end between January 1985 and December 2014 in each of the five markets based on the local currency MSCI indices. The average chance of a three-year positive return in those five markets was 77%. 

4. The Federal Open Market Committee (FOMC) holds eight regularly scheduled meetings per year and may not change the target rate at every meeting. The FOMC may also change the target rate multiple times within the same month; in such instances, we aggregate all changes by month. (link)

5. “Cryptocurrencies Melt Down in a ‘Perfect Storm’ of Fear and Panic,” New York Times, May 12 2022 

6. FAANG stock returns are computed as the average of Facebook (Meta), Apple, Amazon, Netflix, and Google (Alphabet share classes A and C) weighted by market capitalization at beginning of month.

7. Commodities returns represent the return of the Bloomberg Commodity Total Return Index.

Past performance is not a guarantee of future results. Indices are not available for direct investment.
Commodities include increased risks, such as political, economic, and currency instability, and may not be suitable for all investors. This information is intended for educational purposes and should not be considered a recommendation to buy or sell a particular security. Named securities may be held in accounts managed by Dimensional. The content above pertains to cryptocurrency. Certain cryptocurrency offerings may be considered a security and may have different attributes than those described above. Dimensional does not offer cryptocurrency. 
Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission. Consider the investment objectives, risks, and charges and expenses of the Dimensional funds before investing. For this and other information about the Dimensional funds, please read the prospectus carefully before investing. Prospectuses are available by calling Dimensional Fund Advisors collect at (512) 306‐7400 or at us.dimensional.com. Dimensional funds are distributed by DFA securities LLC.