Bulls, Bears and Ballots
During a presidential election year, investors tend to seek a connection between who wins the White House and which way stocks will go.
Think back to December 2019. The economy was humming. Unemployment, interest rates and inflation were at historically low levels. But then what happened?
I do not know anyone who predicted all of that back in December 2019. But what if someone had? What would you have done?
Next question: What if that person told you that, despite all that news, the Russell 3000 would average a return of 10% a year over the next three years? (4) Would you have believed them? Would you have stayed in the market?
Because that is what happened. A yearly return of 10%! That is pretty darn close to the stock market’s historical average over the past century. (5)
The conclusion I hope you reach is that it is unrealistic to think you can outguess markets. You are probably better off expecting that markets do their job of capturing the human ingenuity taking place every day across thousands of publicly traded companies around the world.
What do I mean by markets doing their job? When news of the pandemic hit, markets adjusted and prices went down. In other words, when uncertainty peaked around March 2020, investors demanded a higher return to jump into the market. Then, when news of a vaccine spread, the market adjusted its expectations accordingly. In the short term, there are often wild swings up or down. Making a change during either can be dangerous.
The past three years were a good test of whether or not you had an investment plan that was sensible to stick with. So take a moment to think about why you did what you did, and prepare for next time. Because the next three years may be just as uncertain.
First, make sure your investment plan is sensible and based on financial science. Second, make sure it is realistic for you and your own unique situation. Even the greatest plan is no good if you cannot stick with it during tough times. Invest in markets in whatever asset mix is right for you. If you are not sure, talk with a financial advisor who can help you.
I do not make predictions, but I do believe in the power of human ingenuity to fix problems big and small, innovating the whole way. What has stayed constant throughout my life is the power of people to make progress in the face of challenges.
We have seen it in the fight against COVID-19, where vaccines developed at lightning speed are now being administered around the world. We have seen it in the continued progress of gene therapy, which is revolutionizing the treatment of multiple diseases. So as we start 2023, let’s remember the lessons of the past three years. Let’s develop, and stick to, plans that take us through the short-term ups and downs of market fluctuations so we can capture the long-term benefits of human ingenuity.
This post was written by David Booth (Executive Chairman and Founder of Dimensional Fund Advisors). This article was also first distributed by Dimensional Fund Advisors. Shore Point Advisors adheres to a similar investing philosophy to the one that is implemented by Dimensional Fund Advisors, which is the reasoning for the reposting of this article.
FOOTNOTES
(1) S&P data © 2022 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Indices are not available for direct investment. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment. Decrease of 19.6% was from Jan. 1, 2020–March 31, 2020.
(2) Facebook-parent Meta, Amazon, Apple, Netflix, and Google-parent Alphabet.
(3) Gwynn Guilford, “U.S. Inflation Hit 7% in December, Fastest Pace Since 1982,” Wall Street Journal, January 12, 2022.
(4) In US dollars. Russell 3000 Index annual returns December 2019–November 2022. Copyright © FTSE Russell. All rights reserved.
(5) In US dollars. S&P 500 Index annual returns 1926–2021. S&P data © 2022 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.
DISCLOSURES
The information in this material is intended for the recipient’s background information and use only. It is provided in good faith and without any warranty or representation as to accuracy or completeness. Information and opinions presented in this material have been obtained or derived from sources believed by Dimensional to be reliable, and Dimensional has reasonable grounds to believe that all factual information herein is true as at the date of this material. It does not constitute investment advice, a recommendation, or an offer of any services or products for sale and is not intended to provide a sufficient basis on which to make an investment decision. Before acting on any information in this document, you should consider whether it is appropriate for your particular circumstances and, if appropriate, seek professional advice. It is the responsibility of any persons wishing to make a purchase to inform themselves of and observe all applicable laws and regulations. Unauthorized reproduction or transmission of this material is strictly prohibited. Dimensional accepts no responsibility for loss arising from the use of the information contained herein.
This material is not directed at any person in any jurisdiction where the availability of this material is prohibited or would subject Dimensional or its products or services to any registration, licensing, or other such legal requirements within the jurisdiction.
“Dimensional” refers to the Dimensional separate but affiliated entities generally, rather than to one particular entity. These entities are Dimensional Fund Advisors LP, Dimensional Fund Advisors Ltd., Dimensional Ireland Limited, DFA Australia Limited, Dimensional Fund Advisors Canada ULC, Dimensional Fund Advisors Pte. Ltd., Dimensional Japan Ltd. and Dimensional Hong Kong Limited. Dimensional Hong Kong Limited is licensed by the Securities and Futures Commission to conduct Type 1 (dealing in securities) regulated activities only and does not provide asset management services.
RISKS
Investments involve risks. The investment return and principal value of an investment may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original value. Past performance is not a guarantee of future results. There is no guarantee strategies will be successful.
DISCLAIMERS
This material is intended for general public use. By providing this material, we are not undertaking to provide investment advice for any specific individual or situation, or to otherwise act in a fiduciary capacity. Please contact one of our financial professionals for guidance and information specific to your individual situation. This is not an offer to buy or sell a security.
Shore Point Advisors is an investment adviser located in Brielle, New Jersey. Shore Point Advisors is registered with the Securities and Exchange Commission (SEC). Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. Shore Point Advisors only transacts business in states in which it is properly registered or is excluded or exempted from registration. Insurance products and services are offered through JCL Financial, LLC (“JCL”). Shore Point Advisors and JCL are affiliated entities.
During a presidential election year, investors tend to seek a connection between who wins the White House and which way stocks will go.
What do you do if you receive a big bonus at work, inherited some money or enjoyed a recent windfall you would like to invest?
Unfortunately, as human beings, we are prone to behavioral tendencies and mental shortcuts that do not always work in our favor.
The trade-off between risk and reward is a key part of any investment strategy. But risk means different things to different people.