“History doesn’t repeat itself but it often rhymes.” This quote, attributed to Mark Twain, is a gentle reminder that broad historical patterns tend to repeat, but perhaps not precisely.
The confluence of high inflation and sluggish economic growth have combined in a way that is similar, but not exactly like previous times in history. It resembles what we’ve been through before.
Despite this, the financial media often describe the formidable circumstances today as “unprecedented and rare.” Nope, untrue. We’ve seen this movie again and again.
Why This Time Isn’t Different
Many of you are familiar with the framed quote from Nick Murray in our conference room that reads, “Optimism is the only realism.” When you're an optimist it doesn’t mean that you think everything will always be great. It just means that you believe things will work out in the long run, even if the short run is challenging.
When you think about the future, you usually don’t factor in how you and others might adapt to change. Economic history is filled with examples of innovation that were sparked by difficult circumstances. Challenging conditions create incentives to approach your decisions differently.
Most investors are carrying a heavy cognitive load today because of how rapidly things change. Bad events happen quickly, while good news moves much more slowly.
For perspective, consider the inflation data published each day by the St. Louis Fed. They publish a Breakeven Inflation Rate that reflects the expectation for inflation over varying timeframes. While current inflation is at a 40-year high, the expectation for inflation is 2.56% per year for the next 5 years per this data.
Bestselling author Morgan Housel writes, “A lot of finance consists of very educated people being shocked when something that’s consistently happened for hundreds of years happens again.”
Stock market cycles aren’t predictable, but they are relatively constant over long periods of time. Markets go up and down, not up and up.
If you’re like many investors, you gravitate toward the familiar. Historically, the stock market has positive results in about 75% of the calendar years. So, up-market periods are more familiar than those with negative outcomes. During your investing lifetime, you’ll experience both.
How To Weather The Storm
Financial planning provides built-in “shock absorbers.” After all, financial planning is a process based on an understanding that things won’t happen exactly as you planned.
So, how do you weather the storm knowing that eventually calm seas will return? First, take a hard look at your net worth including investments, retirement accounts, real estate, business interests, and any liabilities. Next, make sure that you have sufficient liquidity and flexibility to endure any rough seas ahead. Start there. Ready for a real conversation?