This Week’s Blogger: Scott D. Heins, CFP®, IAG Chief Investment Officer
Scene 1: Flush with abundant money provided by Congress and the Federal Reserve, consumers and traders celebrate an astounding recovery from the economic impact of a global pandemic and expectantly welcome an exciting new year by pushing stock prices to record highs.
Scene 2: Scarred by skyrocketing prices and interest rates as well as punishing blows from both the stock and bond markets, consumers and traders plod into a new year downtrodden and weary. Gloom from an imminent recession casts a pall over any glimmer of optimism that trespasses in this forsaken world.
While a bit overdramatic, these scenes are pretty close to reality.
Last year January started off with record high stock prices on the first day of trading. We never saw that level of optimism again throughout the entire year.
This January started off on a negative note, with stocks falling back into bear market territory yet again. We never saw that level of pessimism again for the entire month.
We all know that past performance does not predict future results, but past performance does predict our perceived potential for future results.
When the financial markets are trending up, we naturally extrapolate that positivity into the future indefinitely. Hence, traders’ misguided cheer heading into 2022.
When the financial markets are trending down, we naturally extrapolate that negativity into the future indefinitely. Hence, traders’ misguided dour mood heading into 2023.
The key to staying on track through all of these naturally-occurring disorienting expectations is to flip the script with logic. Logic is much more boring than riding the roller coaster of extrapolated emotional expectations, but perhaps you could benefit from a bit of stoic contrarian thinking.
When stock prices are low(er), are your future long-term returns likely to be high(er) or low(er)? Of course, we have no way of predicting the short-term direction of the markets which could trend down, but over longer periods it is mathematically better to own stocks when their prices are low(er) because this indicates the potential for high(er) future returns for patient investors.
Throughout the course of history there is not a single example of the stock market going down and never reaching a new record high over the long-term. Sometimes it takes a really long time to reach a new record high. Sometimes it takes a relatively short time. But it has never not happened.
When we (reluctantly) give up on the deceptive notion that we can predict the future, we can objectively create an investment plan that seeks a consistent level of risk aligned with our personal financial plan. This gives us the freedom to ignore incendiary click-bait headlines, to counsel our hand-wringing distraught friends and family, and to maintain our level-headed approach to long-term portfolio profitability.
While the script has flipped from 2022 to 2023, traders can always flip it again as they cycle through their usual bouts of panic and euphoria. Through it all, the only script we care about is the personal script we are helping you write for your family and your future.
Securities offered through LPL Financial. Member FINRA/SIPC. Investment advice offered through IAG Wealth Partners, LLC, (IAG) a registered investment advisor and separate entity from LPL Financial.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
Any opinions are those of IAG and not necessarily those of LPL Financial. Expressions of opinion are as of this date and are subject to change without notice. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. No strategy assures success or protects against loss. Investing involves risk including loss of principal.
Quote of the week:
John Templeton: “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.”
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