If you have kept your nerve during 2022 and remained invested in stocks heading into 2023 then you have been amply rewarded so far this year. With the MSCI World Index up about 6% year-to-date, the question for today’s investor becomes: Is this a “bear market rally” or is the start of a new liftoff for the world’s equity markets?
The truth is that there is no way to answer this question definitively. The good news is that you don’t have to.
We know that over the long term, the world’s big publicly-traded companies are really good at making money. When it comes to the reality being represented in the shorter-term price swings, the question of what an investor should do can become a bit blurred.
A lot of people will try to make money by telling you what to do in the short term. They’ll claim that they know which stocks are about to pop in the next couple of weeks, or which sectors are just a “bubble waiting to pop”.
Here’s what the actual math has to say. If we look at investing in the stock market in 10-year chunks, there has been only one time since World War II that the stock market has posted a loss – and that was the brief period from 1999-2010. If you invested all of your money at the absolute peak of the dot-com bubble, then you would have likely had to wait 11-12 years to “break even” – and that’s the worst-case scenario. In contrast, the best 10-year stretch (from 1949 to 1959) returned over 21%.
If we stretch out the relevant time period to 20-year chunks, we see that the worst-case scenario is a gain of about 5%. Even the 20-year period of 1929-1949 – which included a Great Depression and a World War – saw an overall 2% gain. For 30-year chunks of time since World War II, we see that there has not been a time where your average annual return was less than 8%. I don’t know about you, but it certainly seems like we’re not exactly at the peak of a scenario similar to the dot-com bubble. Maybe we’re not at the absolute bottom of the business cycle yet, but given how much negativity we’ve had in the headlines over the last year, I think it’s pretty hard to argue that we’re at the top.
The Economy Is Not the Stock Market
A common mistake for many investors is to read a lot of sensationalized economic news headlines and then act on a belief that they can use that information to give their portfolio an edge in the stock market.
There are a few problems with that equation.
1) The value of the biggest companies in the world (the one’s traded on stock markets) is not directly tied to the broader economy. Two percent GDP growth is not all that relevant to how many iPhones Apple will sell.
2) The stock market is forward-looking. It has already anticipated whatever economic headline you’re seeing, digested that information, and then worked that knowledge into the current stock price.
3) Most of the people writing those headlines are not writing them with the goal of informing you and explaining nuanced concepts. In most cases, their only goal for that headline is to get you to click on the article. In other words, they simply want to hit your “fear button” as hard as possible, not to pass along relevant investing information.
Best Stock Investment Strategies for Volatile Times
Go ahead and read what people were saying about stocks back in October 2022. You’ll read a ton of “experts” explaining that “the market was going to test new lows” and that investing in stocks was like, “trying to catch a falling knife”. Of course, since October 2022, the world’s stock markets are up more than 20%.
The only way to realize the benefits of being invested in the stock market is to fully understand what that process consists of, and then to make an investment plan you’re willing to stick to over the long term. If you know that you’re going to have a hard time seeing your portfolio gyrate up or down by thirty percent in a single year, then you should really consider buying shares of companies that are already mature and generate positive cash flow in all market conditions. Sure, you’ll miss out on the odd Amazon or Netflix, but if the alternative is constantly worrying if you should be in or out of the overall market, then your priority needs to be making sure that your plan is one you have faith in and will stick to.
That data point can disproportionately drive stock market prices in the short term. But this is for sure Apple will continue to sell iPhones, railways will continue to charge companies to move goods, pipelines will continue to bring oil and gas to places that need it, and banks will make money from lending your deposits at higher rates. In other words – the world’s most profitable companies will continue to make money.
Stay away from alarmist news headlines, focus on companies that have durable competitive advantages, and ignore the noise. Your future portfolio will thank you!
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