The financial markets have been volatile since the beginning of the year. After three great years, the stock market has been down significantly in 2022. Interest rates have risen causing bond prices to fall too. That’s a double whammy we haven’t seen too often.
In the face of this bad news, what, if anything, should you do to adjust your long-term portfolio management strategy? If you developed a sound strategy in the first place, and built a solid portfolio to implement it, your best bet is to do nothing. Here’s why.
The stock market
There are always grim headlines about turmoil in the financial markets, threats to world peace, or disasters of one kind or another. As you can see below, the stock market has historically risen over time despite the headlines.
Q1 2022 hedge fund letters, conferences and more
Unfortunately, the ride up is not a smooth one.
Since 1980, the S&P 500 index has had positive returns in 32 of the past 42 years. But the red dots in the graphic below show that in most years, even the positive ones, there has been a significant decline at some point. The average decline is about 14%, which is not too far off the decline we have seen so far in 2022.
Let’s put this year’s stock market decline in perspective. As you can see below, the market was down for the year almost 15% as of May 6, 2022. That doesn’t feel good to anybody.
But looking back over the past 12 months, we are not too far off where we were a year ago. Not great, but not terrible.
Now let’s look back over the last five years. You can see that even with the recent declines and the Bear market we experienced in 2020, we are still far ahead of where we were 5 years ago.
This shows the value of patience in the market.
The stock market’s recent behavior is well within historic expectations. There is no reason to expect its behavior to depart from historical patterns going forward. There will be ups and downs as we move forward, but the market should rise over the long-term.
When it does, investors will benefit again from the strong returns the stock markets have historically provided.
Read the full article here by Scott MacKillop, Patrick Krulik and Geoff Selzer, Advisor Perspectives.
