Once again, the market has taken a noticeable pull-back. With Fed decisions and Covid flashing in the news, uncertainty is in the air. As we process rapid market movements, let’s review some historical comparisons.
First, on average, the market experiences a sizeable drop once a year. So, market corrections are not a surprise – they are to be expected.
Second, regarding the magnitude of the current pull-back, the US market is valued approximately the same as it was in the early to mid 2021. We may see it fall even further, but let’s not forget the market’s long-term record.
Third, as we consider the market’s history, we should use hindsight instead of reacting based on emotion to make the best possible decisions. For example, here is a chart of the growth of $1 invested in the S&P 500 from the benchmark’s inception through December 31, 2021.
In less than 100 years, a single dollar has turned into more than $14,000. It is a good reminder of the power of long-term market compounding. Imagine a person with the courage to put $100 in the market at the end of the Great Depression in the 1930’s – that $100 would be worth well over $1,000,000 today. It seems unlikely that person spends much time thinking about the market dip in the late 1980s. For investors today, the lesson to learn is the same: stick with the plan and reap the reward in the future.
A more recent example is the all-too-common story of the investor who was scared out of the market in the flash crash of March 2020. Now almost two years later, most of these investors are wishing they could go back in time and tell themselves, “Don’t panic, it’s going to be okay. Constantly worrying about the market’s movement is a waste of time. Instead, focus on living your best life.” In hindsight, the drop was just another blip on the radar as equities march upward.
As prudent investors, we should behave in a way that gives us the highest probability of long-term financial success. We should focus on using our finances to reach our life goals. The best way to do this is by remaining steadfast and calm through the short-term tribulations.
Lastly, on a more positive note, it is good news for long-term investment health that interest rates are rising. Fixed income has been in a precarious position since rates were slashed in early 2020. Making the bond environment attractive will inevitably affect the equity markets as it is now – but rising rates create a more well-rounded future for investors as a whole. Enduring the down days is the challenge we face to eventually get to the more robust investment environment down the road.