Quarterly Letter: Reflections
Every January, it is typical to reflect on market data from the previous year. You will see the results in your own quarterly reports, as well as across the usual flurry of broad market analyses.
Even when the numbers are not what investors would prefer, we review for the insights available as the returns guide financial plans. However, whether the numbers are up or down in any given year, we caution against letting them alter your mood, or as importantly, your portfolio mix. When it comes to future expected returns, one year’s performance is among the least significant determinants available.
To illustrate, consider what happened in 2022, and how global markets reacted.
In the thumbs-down category, U.S. stock market indexes turned in annual lows not seen since 2008, with big tech stocks leading the downside. Bonds were also affected, as the U.S. Federal Reserve raised rates to tamp down inflation causing lower bond prices. The U.K.’s economic policies resulted in Liz Truss becoming its shortest-tenured prime minister ever, while Russia’s invasion of Ukraine and China’s continued COVID woes negatively impacted the global economy.
On the plus side, inflation has appeared to be easing slightly, and so far, a recession has yet to materialize. A globally diversified, value-tilted strategy coupled with a short-term, high quality bond focus has helped protect against a portion (certainly not all) of the negative returns. An 8.7% Cost-of-Living Adjustment (COLA) for Social Security recipients has helped ease some of the spending sting.
Were the aforementioned events and resulting performance predicted by market prognosticators last January? Given the unique blend of social, political, and economic news that defined the year, it is unlikely anything but blind luck could have led to accurate expectations at the outset.
In fact, even if one believed they knew we were in for trouble back in early 2022, it is entirely possible they are altering reality, thanks to recency and hindsight bias. The Wall Street Journal’s Jason Zweig ran an experiment to demonstrate how our memories can deceive us. Last January, he asked readers to send in their market predictions for 2022. Then, toward yearend, he asked them to recall their predictions (without peeking). The conclusion: “[Respondents] remembered being much less bullish than they had been in real time.”
In other words, just after most markets had experienced a banner year of high returns in 2021, many people were predicting more of the same. Then, the reality of a demoralizing year rewrote their memories; they subconsciously overlaid their original optimism with today’s pessimism.
Where does this leave us? Clearly, there are better ways to prepare for the future than being influenced by current market conditions, and how we are feeling about them today. Instead, everything we cannot yet know will shape near-term market returns, while everything we have learned from decades of disciplined investing should shape our long-range investment plans.
We wish you and yours a happy and healthy 2023, come what may in the markets. This, and every year, we remain grateful for our relationship. As always, please let us know how we can help.