So far, 2022 has been an extremely unkind year to investors. To recap, as of this writing:
- The S&P 500, which tracks the 500 largest US stocks, is down over 10%
- The technology heavy NASDAQ NDAQ , that has delivered stellar performance for over a decade, is down nearly 18%
- The Russell 2000, which represents small company US stocks, is down over 14%
- Publicly traded real estate, which was up approximately 40% last year, is down over 5% this year
- The European market is down over 11%
- Investment grade bonds, which typically offer stability within an investor’s portfolio, are down approximately 9%
Virtually the only bright spot in the markets is commodities, particularly energy stocks which are up over 34% this year. This sounds exciting. However, before you jump to ask why you don’t own more energy stocks, keep in mind that the energy sector delivered no returns net of inflation for 15 years (2006-2020). That means, until recently, owning energy stocks for an extended period of time produced no returns.
The market turmoil can be attributed to several factors, including:
1) Geopolitical concerns over the Russia-Ukraine war and its global impact.
2) The highest inflation in more than 40 years, including significant increases on non-discretionary items like gas and food. This has been financially devastating for many Americans.
3) The Federal Reserve raising interest rates in order to tame inflation has caused the high quality bond market to crash and will likely cause many parts of the economy to experience a slower rate of growth.
Now that I painted a picture of doom and gloom, the question on every investor’s mind is obvious: What am I supposed to do now?
The answer is best summed in just three words, the phrase from the late legendary founder of Vanguard, John C. Bogle: “Stay the course.”
While this short phrase may seem simple, it is far from easy. Telling investors to sit on their hands and do nothing seems counterintuitive. Humans have a tendency to want to “ patchke ”, which is the Yiddish word that means to inexpertly fuss or tinker with something, including their portfolio. Doing something feels right when there is a problem to be fixed.
Generally speaking, working harder, training more intensely, and exerting more effort are all proven ways to succeed. Whether it’s sports, school, or working your way up the corporate ladder, pushing yourself to be more active generally leads to positive results. However, with investing, doing less is oftentimes better. Assuming you have clearly defined goals, a proper strategy in place, and an asset allocation that matches that strategy, then doing nothing at all is the optimal approach at this time.
Remember, markets move in cycles. This is a characteristic of the economy and the stock market. It is not an anomaly. We happen to be in a particularly interesting phase of the cycle right now where investors of all shapes and sizes are feeling pain. The only certainty during these uncertain times is that this cycle will eventually end and another bull market will follow. When that will occur is anyone’s guess. The key right now is to “Stay the course.”
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