- July 11, 2024
I mean it. You’ve done well in a challenging time for investors. Occasionally it's helpful to take a minute to acknowledge success and what led to it before getting back to work. And I think now is as good a time as any to do that.
The last six years have been emblematic of Warren Buffet’s assessment that investing is simple but not easy. We could look back at the last six years and see a 120% cumulative, or 14% annualized, total return from the S&P 500 and say, “that wasn’t so hard.” Upon closer examination, it turns out it was quite challenging, but you hung in there and earned the market’s returns.
Figure 1: It certainly wasn't a smooth ride up! But we’ve been rewarded for patience.
Why focus on the last six years?
Three Bear Markets in six years: 2018, 2020, and 2022.
We often talk about the need to invest with the expectation that Bear Markets will occur, but through most of market history they have happened every five to six years. Three of them in a six year period is a bit of an outlier and worth noting.
It might be easy to brush off the Covid Crash in 2020 as something different, but it happened. It caused a lot of economic and investment dislocation, and it needs to be acknowledged as such. And the things that tend to do the most economic and market damage are those that are not on anyone’s radar or on lists of top risks to the market.
Figure 2: The dip at the end of 2018 actually started in September that year and reached an intra-day low of 20% peak to trough on Christmas Eve 2018.
An end of the Fed’s Zero Interest Rate Policy, a return to it, and what seems to be the actual end of it.
This one might be a stretch because the Fed started raising their benchmark rate at the end of 2015, but they were gradual through 2016 and 2017 before accelerating their rate increases during 2018. This was notable because they maintained the zero policy for nearly seven years before starting to raise rates.
When we thought the Fed was done with their zero policy, along came Covid and its impacts on markets and the economy, and we went right back to the zero policy. This seemed to be effective at the time but perhaps lasted too long, giving way to the highest inflation in 40 years (see below) and the fastest increase in the Fed Funds rate ever.
Figure 3: Not pictured is the several years of 0% Fed Funds rate prior to 2016. Lower rates, but unlikely to return 0%, seem to be on the horizon.
The highest inflation in 40 years.
Economic scholars will likely debate the causes of our recent inflation for many decades (they still debate causes of the Great Depression, 1970’s inflation and other past economic events). Suffice it to say for now, regardless of the exact causes of the recent inflationary environment, we most certainly experienced it.
Similarly, up for decades of debate will likely be inflation’s relatively quick and orderly decline, after which we have now approached inflationary levels in line with the last 10-20 years’ averages.
Figure 4: Much media attention was paid to the rising and high inflation of 2022 and 2023, but the return to average has flown under the radar.
The prior six year period couldn’t have been more different.
Times of relative calm in markets tend to lead investors into complacency, forget that markets have risk, and to think that investing can be simple and easy. And the years 2012 through most of 2018 were perhaps some of the most benign years markets have ever seen with only two declines of 10% or more, the largest one being approximately 12%. Despite the notable differences between the two six year paths, the returns are strikingly similar!
Figure 5: Barely a few blips in the path higher over these six years. Seemed easy! Only in hindsight, though.
Why you were successful
Let’s start with some things you didn’t do that contributed to your success, because there are more of them – despite many of them often pitched as sure ways to avoid market risks.
You didn’t try to time markets, sell out of or otherwise avoid stocks during market declines.
You didn’t shun stocks in favor of investment products that claim to shield you from the market’s declines.
Figure 6: Some investments are pitched to avoid market volatility. However, avoiding volatility can also avoid returns and come with high fees and tax inefficiencies.
You didn’t chase the hot investment fad. Even if the hot investment fad was as dull as 5% Treasury bills and money market funds.
Figure 7: 5% Treasury bills and Money Market Funds feel safe but pose different risk if we over allocate to them.
You didn’t try to solve inflation by investing in commodities.
Figure 8: Evidence continues to mount that commodities fall short of the traditionally held belief that they offer a hedge against inflation.
The single most important reason for your investment success is that you chose to be a long-term, goal-focused investor with a plan to invest accordingly. And this is the only thing that matters when investing in the face of external events that are out of our control and don’t impact our goals.
Making this decision and investing in a diversified portfolio with an eye to your goals is a simple act. Sticking with it, despite regular noise and distraction, is the hard part.
Will the next six years be different?
A phrase that often gets thrown about when markets start declining or other disruptions happen is “this time is different.” It makes the point that a certain market event will require a different investment strategy or that it’s “the one” that won’t see a recovery. Or, in bull markets, that this is as good as it's going to get.
Others will say that the four most dangerous words in investing are “this time is different” to dismiss this concern, essentially saying differences in market eras don’t matter.
I believe the phrase makes a good point, but the conclusion is incorrect.
Every era in markets, every bull or bear market, short-term rally, or brief correction is different. It’s caused by something different. It feels different. Investments perform differently during and after. So, every time is, in fact, different. And these differences are why investment basics – the simple part – like risk allocation and diversification are so indispensable.
But the result when viewed through a long-term lens is always the same. No, annual returns won’t always be 14%. Sorry. But, more importantly, despite the ebb and flow of markets over time, we can always expect to be compensated for owning diversified baskets of stocks of the most well-run and best-capitalized companies of the world. Temporary declines, whatever their cause, will turn into new bull markets. And new all-time highs will be surpassed by more all-time highs.
Figure 9: Even at high water marks, future stock returns have a great track record. We just can't expect those returns to follow a straight line up.
So, congratulations on your success. You’ve earned it. It hasn’t been easy.
Please keep all this in mind whether it’s for the next six weeks, six months, six years or six decades.
Thanks for reading.
