Have you checked the financial news lately? How did it make you feel?
Longtime readers of my newsletter may recall a blurb some months ago with the message "don't believe the hype of the financial media". The news was all doom and gloom, with warnings about inflation and recession and negative stock market predictions. But, I explained, financial news outlets exist to sell advertisements – and negative articles get more eyes on ads than positive ones. I suggested that most investors would be well served by continuing to invest with a long-term focus, ignoring most of the terrible short-term predictions.
You may have noticed, though, that inflation is a big problem, the economy is struggling, and the stock market has been a bummer for the last year. So what gives?!?
As hard as it is to grit your teeth and bear it, the truth is that the bad years are as much a part of the process as the good years. (This is true in both investing and life.) Since you presumably want your investments to grow and last you the rest of your life, it's important to choose an investment strategy that accounts for all of those bumps and bruises along the way. My advice remains unchanged, though perhaps a little perspective will help.
Humans have evolved to feel negative outcomes about 2-3 times more powerfully than positive ones. It's a useful instinct for survival, but it has its limits. We are almost hard-wired to think that if things are not going the way we want all the time – steady economic growth, low inflation, positive investment returns – then something is wrong. But, of course, that's not how life is. Good and bad things happen to everyone all the time. C'est la vie.
Interestingly, though, the odds are actually in your favor when it comes to long-term, buy-and-hold investing. That's right: despite all the doom & gloom and negative headlines, the stock market is actually positive far more often than not.
Annual stock market returns over the last hundred-ish years have been negative about 27% of the time, or about one in every four years. Hidden in plain sight is just how often things go right! Returns are positive an average of about 3 out of every 4 years – about three times as often as negative returns. The average length of a bear market (when index prices drop by 20% or more from recent highs) is 289 days, while bull markets (in which stock index values are rising) tend to last 991 days – about 3.4 times as often. And periods of expansion have outnumbered recessions more than 4-to-1 in the last 70 years.
So why don't we talk about those good times as often or as emotionally as the bad ones? Honestly, we just feel it differently. Avoiding bad feelings is instinctually more important than pursuing good feelings. That's why bad news makes headlines while good news gets taken for granted. If you can see through those headlines, though, you actually have a huge advantage over the people who opt out when the going gets tough.
The trick is that no one knows which years will be good and which will be bad, so staying invested the whole time is the safest, smartest move. Now I'm not saying it's easy to keep your cool while your nest egg drops in value. It's hard. It feels bad. It takes patience. You will see many bear markets and recessions throughout your life. If the success of your investment strategy is contingent on everything going your way, then you're in for a rough ride.
But if your investment plan takes into account the likelihood of many cycles of ups and downs over the rest of your life, then the good years should outnumber the bad by about 3-to-1. Not bad!
If you're wondering how to position yourself for the year ahead – given that absolutely no one knows what will happen in the year ahead – my best advice is to choose a strategy that is likely to work for the next 10 or 20 or 30 years and stick with it. And if you're wondering how well your own investment plan matches your goals, drop me a line! You can schedule a call using the link below the signature. Thanks!
Timothy Iseler, CFP®
Founder & Lead Advisor
Iseler Financial, LLC | Durham NC | (919) 666-7604
Iseler Financial helps creative professionals remove stress while taking control of their financial futures. As both advisor and accountability partner, we help identify current strengths and weaknesses, clarify and refine your long-term goals, and prioritize understandable, manageable, and repeatable actions to bring long-term financial well-being. Reach out today to take the first step.