The simultaneous decline in stocks and bonds and the tempered expectations for market success present investors with a problem on how to react, if at all. Investors must contend with soaring inflation in most developed economies, the possibility of the end of a protracted period of “easy money” central bank policies, the war in Ukraine, and the effects of the Covid-19 pandemic, including shutdowns that could disrupt the Chinese economy, in addition to disappointing short-term returns and a spike in volatility.
The Federal Reserve (Fed) and the Bank of England both increased their respective interest rates last week, adding to an already erratic time.
Some investors may be tempted to leave the markets and move to cash due to the current economic and financial difficulties, but doing so would nearly guarantee a negative return when accounting for risk.
Future results cannot be predicted based on past performance. Since you cannot directly invest in an index, the performance of an index is not a perfect reflection of any specific investment.
Clients should also refrain from timing the market since historically, the greatest and worst trading days have coincided, making it challenging to avoid one without the other. A prime illustration of that occurred last week when US stock prices rose the day the Fed announced its rate rise before falling the next day.
Also, keep in mind that some of the finest trading days have taken place amid extended market downturns. Absence from such important trading days reduces long-term gains.
Please keep in mind that the returns data below only includes the 500 largest US-listed firms and is expressed in US dollars. However, the US market represents well over half of all shares in terms of value, and the situation is similar in other currencies.
The bottom line for investors is that maintaining a long-term investing plan may be the surest path to financial success. In the past, patient, long-term investors would have gained more from sticking with their plans than by trying to time the market when it is tumultuous.