Let me start by wishing you and your family a very happy and healthy New Year. My investment strategy is, and has always been, long-term, goal-focused, and plan-driven. I believe that the key to lifetime success in investing is to act continuously on a specific, written plan. I believe substandard returns and even investment failure proceed inevitably from reacting to, let alone trying to anticipate, current economic or market events. I am convinced that the economy cannot be consistently forecast, nor the markets consistently timed. Therefore, I believe that the only reliable way to capture the full long-term return of equities is to ride out their frequent but historically, always temporary declines. To that end, some important data to consider: - In the last 41 years, the average intra-year decline of the S&P 500 was slightly more than 14%, yet it finished the year with a positive gain in 32 of those 41 years.
- On average, one out of every five years, the decline has averaged at least twice that amount.
- And on two occasions (in 2000-02 and 2007-09), the Index has actually halved.
- Yet the S&P 500 began 1980 at 106 and finished the year 2021 at 4,766.
- Over 41 years, the S&P 500 average annual compound rate of total return, with dividends reinvested, was more than 12%.
This data underscores my conviction that the essential challenge to long-term successful equity investing is neither intellectual nor financial, but temperamental: it is how one reacts, or chooses not to react, to market declines. These principles will continue to govern the essentially behavioral nature of my advice to you in the coming year…and beyond. It seems counterproductive to look at these past 12 months in isolation. They were the second act of a drama that began early in 2020, the greatest global public health crisis in a hundred years. The world elected to respond to the onset of the pandemic essentially by shutting down the global economy—placing it, if you will, in a kind of medically induced coma. In this country, we experienced the fastest economic recession ever, and a one-third decline in the S&P 500 in just 33 days. Congress and the Federal Reserve responded all but immediately with a wave of fiscal and monetary stimulus. This renders most economic forecasting—and investment policy based on such forecasts—hugely speculative. If there were ever a time to just put our heads down and work our investment and financial plan—ignoring the noise—this is surely it. If 2020 was the year of the virus, 2021 was the year of the vaccines. Vaccination as well as acquired natural immunity are in the ascendancy, regardless of how many more variants are discovered. This fact seems to be the key to a coherent view of 2022. In general, I think it most likely that in the coming year (a) the lethality of the virus continues to wane, (b) the world economy continues to reopen, (c) corporate earnings continue to advance, (d) the Federal Reserve begins draining excess liquidity from the banking system, with some resultant increase in interest rates, (e) inflation subsides somewhat, and (f) barring some other unforeseen variable, equity values continue to advance, though at something less than the blazing pace at which they've been soaring since the market low of March 2020. Please don't mistake this for a forecast. All I said, and now say again, is that these outcomes seem to me more likely than not. I'm fully prepared to be wrong on any or all of the above points; if and when I am, my recommendations to you will be unaffected, since our investment policy is driven entirely by the plan we've made, and not at all by current events. With that out of the way, allow me to offer a more personal observation. These have undoubtedly been the two most shocking and terrifying years for investors since the Global Financial Crisis of 2008-09—first the outbreak of the pandemic, next the bitterly partisan election, then the pandemic's second and more virulent wave, a third more contagious major wave, and most recently a 40-year inflation spike. You might not be human if you haven't experienced serious volatility fatigue at some point. I know I have. But much like the Global Financial Crisis, what came to matter most was not what the economy or the markets did, but what the individual investor did. If the investor fled the equity market during either crisis—or, heaven forbid, both—their investment results seem unlikely ever to have recovered. If on the other hand they kept acting on a long-term plan rather than reacting to current events, positive outcomes followed. This has always been the case. I expect it always will be. On a personal note, too many of us learned about loss in profoundly painful ways these last two years. The loss of livelihood, of lifestyle and of loved ones. We all were reminded of how painful life can be without the presence of our friends and family. It has been a very long two years indeed. The recovery ahead will undoubtably be bumpy at times, this is all but inevitable. Yet it will happen none the less. With that said, we all have much to be grateful for and reason to stay steadfastly optimistic. I welcome your comments, questions, and concerns. I can't predict, but I can plan. As always, thank you for being my clients. It is a privilege to serve you. Sincerely, Anthony P. Longobucco Sources: Standard & Poor's; Yahoo Finance; J.P. Morgan Asset Management “Guide to the Markets” (p. 16); S&P 500 Return Calculator with Dividend Reinvestment, DQYDJ.com. |
