2021 was a year to remember and also one you might like to forget. With COVID lockdowns, business interruptions, and public health issues, you might think the financial markets would have suffered. Thankfully, this was not the case – in fact, the markets had a banner year.
As we begin 2022 let’s revisit some guiding principles to help you successfully navigate through these unusual times.
20 years ago I authored a booklet titled Timeless Wisdom for the Information Age Investor.
The first principle I discussed in this booklet was the disconnect between ‘information’ and ‘wisdom’ for investors. The disconnect today is even wider. ‘Information’ abounds but mostly it’s useless noise at best. Wisdom and information are two very different things.
Timeless Wisdom and Guiding Principles
The broadest and most overarching principle for investors is Optimism. Optimism is the historic reality in finance, medicine, technology, and almost everything else.
When you look at the world it’s easy to imagine bad things staying bad—in reality, the world adapts. Optimism is the only realism.
Your very personal and very specific financial planning goals provide the purpose for your investing. Successful investing revolves around your purpose – what you are trying to achieve financially.
To sustain financial success, you need to focus on long-term planning outcomes. There will inevitably be periods where you are tempted to stop saving and investing but good long-term outcomes require continuous actions in support of your particular planning goals.
Economic and market forecasts are unreliable as a basis for making smart financial decisions. The only dependable way you can capture the full long-term returns from the market is to ride out the frequent but historically temporary declines.
How Market History Provides Perspective
The winds of change are blowing as we begin 2022. The events of the past two years have worn out investors and you can certainly be excused if some volatility fatigue has set in. In fact, you might not be human if you haven’t experienced some serious fatigue.
With all the uncertainties during 2021, the broad stock market was surprisingly stable producing a 27% return. In the 42 years beginning with 1980, investors experienced average intra-year declines of about 14%, but in 2021 this peak to trough decline was only 5%. While the world was volatile in 2021, your investments were not.
Investors can gain valuable perspectives by looking at the entirety of the 1980-2021 timeframe. The S&P 500 began 1980 at 106 and ended 2021 at 4766. While the S&P 500 was positive in 32 of these 42 years, there were five years where the intra-year declines were greater than 30% - including 2020.
These data show how important it is to stay in your seat. The essential challenge for most investors is neither intellectual nor financial, but temperamental – how you react to market stresses matters most.
Among our chief aims is to help clients fortify their financial future. The more resilient you are, the more you can relax about scary short-term events.
To become financially fortified you must avoid two illusions: the illusion of control and the illusion of now.
You can control your savings, investment allocations, and behavior. You can't control the financial markets, the economy, or politics. Understanding what you can and can’t control is essential.
The illusion of now is the extrapolation of the present into the future without change. There are always things happening today that can cause you angst. The financial decisions that you make, however, concern your long-term future. If you continually react to short-term events, your financial future suffers.
As always, I welcome your comments, questions, and concerns. Thank you for your trust and confidence. It’s a distinct privilege to help you make smart financial decisions in pursuit of your long-term goals. Happy 2022!
Reminder: The IRS deadline for Consolidated 1099’s from brokerage firm custodians this year is February 17 (the IRS deadline for 1099’s changed starting in 2008). We will send clients our annual tax information summary as soon as the Consolidated 1099’s are available.