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Don't Just Stand There, Do Nothing!

Last year was one of the worst years ever for financial markets. I know that it's August and I should stop talking about 2022, but as a reminder, it was the 4th worst calendar year loss for the S&P 500 in the last 80 years. At the same time, it was easily the worst year ever for the Barclay’s aggregate bond index, which dates back to 1976. Combining stock and bond performance, you have to go back to the 1930s to find a worse calendar year performance for a diversified portfolio. Not many of us were around and investing in the ’30s so that makes 2022 one of, if not the worst market environments of our lifetime.

Historically after a bad year you either get 1 of 2 outcomes: 1. A nice rally or 2. Further losses. So far in 2023, option 1 appears to be playing out. I am not making any predictions on how the year ends. Maybe we give back the year-to-date gains. Nobody truly knows. Regardless of the outcome, this is another good lesson in the power of staying the course and sticking to your plan as an investor. Why? Because what’s the alternative? Trying to guess what will happen next? Good luck with that. Even the “experts” have no idea what will happen next in the market. Don’t believe me? Check out this list of S&P 500 year-end price targets from 16 of the biggest Wall Street firms (right).

The S&P 500 ended 2022 at around 3,840 so there were a handful of firms who expected mild losses in 2023 while most were expecting mild gains. Coming into 2023, inflation had been running above 6% for fifteen consecutive months. The Fed was aggressively hiking interest rates in an attempt to slow the economy and cool inflation. Housing and commercial real estate seemed headed for a slowdown. And then came the regional bank collapses. And then the debt ceiling. With all this going on, it makes sense that Wall Street was nervous coming into the year.

It’s still a little early to grade these predictions but the stock market has outperformed expectations based on where we sit today. As of this writing the S&P 500 is trading at roughly 4,525. So the stock market has already gone up more than any of these strategists predicted for the whole year. Now that the stock market has already surpassed these estimates, many Wall Street firms are revising their forecasts higher. Funny how that works. Wall Street strategists (just like individual investors) get pessimistic when stocks are falling and optimistic when stocks are rising. I don’t share this with you to make fun of these Wall Street firms. (If I wanted to do that I would also show you how wrong their estimates were for year-end 2022.) The point of this chart is to prove how difficult it is to make predictions about the future, especially as it relates to short-term movements in the stock market.

When stocks fall, our emotions make us think they will fall even further. And when stock rise, our emotions make us believe they are going to rise even more. This is why we’re such a big proponent of having an investment plan and a portfolio allocation that you can stick with through a wide range of market and economic environments. Having a plan helps us think and act for the long term even when it doesn’t feel right in the short term. Having a plan means preparing not predicting. Having a plan means doing nothing when that’s what your plan calls for. Unfortunately, doing nothing is hard because markets are constantly tempting you to make changes to your portfolio. Unlike a lot of things in life, doing more or trying harder doesn't guarantee better investment results. In fact, doing more is often inversely related to results in the market.

Bottom Line: In years like 2022 when everything is going down, you'll always wish you would've taken less risk. In year like 2023 when everything is going up, you'll always wish you would've taken more risk. Now is a good time to remind ourselves that taking more risk when things feel safe (like now when you are reading and hearing about “the new Bull market”), or protecting yourself when things feel dangerous (like they did at the beginning of the year), is almost never the right decision, at least not in the stock market.

As always, please feel free to reach out to us directly with any questions. Thank you for the continued opportunity to serve.


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