Are We Recklessly Optimistic?
Since the beginning of 2022, we have had to endure a significant double-digit market downturn. This has, unsurprisingly, created a lot of worry and doubt in many of our clients. It is important to us that we are never cavalier about the emotions of our clients because we understand that these market lows can feel painful in the moment. However, it is crucial to recognize that these downturns are part and parcel of the volatility an investor must bear to earn stock market returns.
One might respond to this by thinking “of course I understand this, but a double-digit downturn seems pretty extreme.” While it may seem extreme, downturns of this size are not only common, but historically they are very frequent. So frequent, in fact, that since 1980 there has been an average intra-year market drawdown of -14%. Despite that being the case, 32 of the last 42 calendar years were positive.
This trend can be observed in the below graphic. The red dots indicate the point during each calendar year since 1980 where the stock market was at its lowest point. The gray bars display the ending market return for each year.
This is all to say that what we have been experiencing so far in 2022 is not only normal, but somewhat expected. That does not mean that it is easy to be optimistic through a market scenario like this one. Shorter-term market activity tends to dominate the focus on news media and market pundits. Yet, such a short-term focus is rarely useful to our clients, and investors more broadly, who typically have long-term goals with timeframes that are measured in years, not months or quarters.
Drawdowns are a natural component of stock market investing and volatility risk comes with reward. Tolerance to volatility involves proactive (rather than reactive) decisions through proper and prudent diversification. This is a primary focus of ours when developing portfolios that make volatility more easily endured. Your ability to prevail through volatility will directly impact your ability to compete against inflation and an increasing cost of living.
In Our View
In our view, no matter where you stand on the suitability spectrum, the key to a successful investment experience is refraining from emotional reactions to short-term noise. Keep your mindset in line with your long-term goals and objectives.
Source: FactSet, Standard & Poor’s, J.P. Morgan Asset Management