A few clients have asked me about the recent volatility in stocks. It may be helpful to keep these two things in mind:
- Over the long term, the economy and the performance of companies determine investors’ returns from stocks. In the short term, it’s the news cycle. The news cycle does not illuminate the things that drive long term results; as you know, the goal of any media outlet (traditional, social, TV, Tik Tok, etc) is simply attention, and bad news gets more attention.
- An investor’s feelings about the political direction of the country is not a good way to make investment decisions… in fact, I think it’s one of the worst ways.
When President Trump was inaugurated in January 2017, a lot of investors were concerned about the direction of the country. Over the next year, the S&P500 gained 26%.
When President Biden was inaugurated in January 2021, a different group of investors were concerned about the direction of the country. Over the next year, the S&P500 gained 18%.
In both cases, the two different groups may have had strong feelings about the political direction of the government, but if they sat out the investment gains of the next year because of those feelings, they missed out on very nice gains.
Over the combined eight years of Trump & Biden, the S&P500 gained almost 200%!
I am not predicting double-digit returns over the next year. I am not making any prediction. I am simply saying that our feelings about politics—good or bad—are not helpful when it comes to making sound investment decisions.
The reality is that market returns are driven by an astonishing array of factors, and while we certainly care about those long term results, we cannot predict them… no one can.
But historically over long periods of time, investors have been rewarded by taking risk in the capital markets. Over short periods, investors experience times when markets are down and it feels like a loss that will keep going and never be recovered. That’s a real feeling. But in a broader time horizon, investors have been rewarded for staying the course and maintaining a diversified risk-appropriate portfolio.
I am happy to talk anytime … please feel free to be in touch.